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Canada's national weekly current affairs magazineTue, 03 Mar 2015 19:12:45 +0000en-CAhourly1http://wordpress.org/?v=3.5.2Conservatives mulling focus on manufacturing sector in budgethttp://www.macleans.ca/politics/ottawa/conservatives-mulling-focus-on-manufacturing-sector-in-budget/
http://www.macleans.ca/politics/ottawa/conservatives-mulling-focus-on-manufacturing-sector-in-budget/#commentsFri, 23 Jan 2015 10:13:04 +0000The Canadian Presshttp://www.macleans.ca/?p=669347Harper and his ministers have been concentrating much of their energy on industry in Ontario

OTTAWA – The Conservative government is considering a strong focus on the manufacturing sector in the upcoming budget, part of a general shift in attention towards Ontario and its prospective voters.

Prime Minister Stephen Harper has faced sharp criticism from the opposition parties that he has ignored Canada’s industrial heartland in favour of the energy sector in his home province.

“While Mr. Harper was busy not caring about manufacturing jobs drying up, his finance minister was telling Ontarians they had ‘no one to blame but themselves,”’ Liberal Leader Justin Trudeau said in a speech to caucus earlier this week in London, Ont.

Harper and his ministers have been concentrating much of their energy in the province, whose manufacturers and exporters stand to benefit from the sagging loonie.

Harper also finally agreed to meet with Wynne earlier this month, the first time in more than a year.

“The oil industry isn’t remotely the entire Canadian economy,” Harper said at an event Thursday in St. Catharines, Ont., as he spoke about the impact of plummeting oil prices.

Industry Minister James Moore recently told CBC News that while the government has done much to advance the cause of oil pipelines, its up to the companies involved to deliver.

That’s a different tone than Harper took shortly after he took office, when he told a British audience that Canada was an “energy superpower,” and that oilsands development was akin to building the Great Wall of China or the pyramids. It was a phrase that would emerge again during a 2012 trip to China.

Senior Conservative sources emphasize that manufacturing has always been on the radar – a two-year extension of the temporary capital cost allowance for equipment and machinery appeared in the 2013 budget. Southern Ontario’s auto industry was also given billions in bailout money in late 2008.

But they also suggest that more help for the sector is top of mind as the April budget is being put together. For example, the accelerated capital cost allowance lets companies write-off the cost of machinery more quickly, thereby lowering their tax bill. One option is to make that a permanent measure.

Harper specifically referred to manufacturing this week, when he dismissed the suggestion his government should readjust its economic plan.

The government is already doing plenty to foster economic health, he said, including “cutting red tape, programs to aid the creation of small business and small business jobs, programs to aid in innovation, programs to ensure the manufacturing sector is strong and growing and revitalized, negotiations to open new markets to trade, and keeping our taxes low.”

Top of the Morning

A welcome dose of perspective from the Globe and Mail’s Tim Kiladze amidst the carnage we’re seeing in the markets: relax, for there are better days ahead.

Here’s some logical advice for everyone who’s panicked: We’ve been here before; we got through it then; we’ll get through it now.

Remember the summer of 2011, when the United States had its debt downgraded and the S&P 500 tumbled 17 per cent in two weeks? How about July, 2012, when Spain’s 10-year bond yields skyrocketed to 7.6 per cent amid fears that countries on the euro zone’s periphery couldn’t control their spending? In every case, investors freaked out.

Yet somehow we survived.

Above all else, that’s the most important story of this rocky recovery. Our progress can be frustrating, because it often feels like two steps forward, one step back. But we manage to improve.

On the Homefront

Is the rout finally over? The TSX was down more than 300 points on Wednesday morning, along with similar-sized losses in U.S. equities, before reversing course to close down by 167 points. Was yesterday morning the capitulation we’ve been looking for, the last wave of selling that marks a trough in this corrective phase? That’s the question on every investor’s mind this morning. And judging by the futures, the answer to that is ‘no.’

Market volatility clearly reigned supreme, and it wasn’t limited to equities. After sinking below 88 cents against the greenback yesterday, the loonie proceeded to spike a full cent – primarily attributable to weakness in the U.S. half of the pair. The pair is making a move lower this morning to trade below 0.882.

Oil breaks below $80. Black gold found a modicum of stability on Wednesday, with WTI crude futures falling far less than they did the previous day. Nonetheless, the TSX Energy sub-group finished just in the red on the day, its 11 consecutive session in negative territory. That’s the segment’s longest losing streak since 1997. One encouraging sign: Suncor (SU), the biggest name in the space, managed to post a decent gain. Unfortunately, things aren’t getting better for the commodity this morning, as WTI crude dipped below $80 per barrel for the first time since June 2012.

…and this may cause the government to rethink tax cuts. Andy Blatchford of The Canadian Presswrites that falling oil prices may put a dent in federal revenues, and cites economists who question whether Ottawa will be able to enact all the tax relief it desires in light of the drop-off in commodity prices.

Will manufacturing sales hit a fresh record high? At 8:30am (EDT), August’s reading of manufacturing sales is slated to be released. In July, sales rose at their fastest pace in three years to set a record high of $53.7 billion. However, in real terms, manufacturing shipments still have a lot of recovering left to do. Economists think sales will take a step back after the previous month’s massive gain, with the consensus estimate calling for a decrease of 2 percent month-over-month. “The details of the merchandise trade report suggested that manufactured exports were down by around 1.5 percent in August, with particular weakness in refined petroleum products and autos – two areas of former strength,” writes CIBC economist Nick Exarhos.

Former SNC-Lavalin executive extradited to Canada. Riadh Ben Aissa, former head of construction at SNC-Lavalin (SNC), returned to Canada from Switzerland on Wednesday and was promptly detained by the Quebec provincial police, according to CBC. He faces 16 charges for allegedly committing fraud in order to win a contract in Montreal after being sentenced to time already served in Switzerland. The black cloud from this scandal has largely been lifted from SNC, but these negative headlines surely aren’t helpful – especially at a time in which everything’s selling off. Earlier this month, CEO Richard Blackwell made the case that the company was essentially too big to prosecute; that any attempts to charge the firm would impair its ability to do business (especially with the government) and could force a change in ownership that would leave SNC’s Canadian employees in danger of losing their livelihoods.

Daily Dispatches

Concerns about a hard landing in China continue to fade. Foreign direct investment into the world’s second-largest economy rose from August to September its first increase since June, while new loans totalled $857 billion, more than economists had anticipated. “[The pick-up in new loans] shows officials are taking some steps to turn things around,” writes IG market strategist Stan Shamu.

Yield spreads on European sovereign debt continue to widen. The yield on a ten-year German government bond hit a record low below 0.72 percent this morning, while Greek debt of the same maturity yields more than 8 percent. In 2012, Mario Draghi asserted that the European Central Bank would do “whatever it takes” to save the currency union, which led to a narrowing of yield spreads between core and periphery nations. To help solve what currently ails Europe has taken considerably more than just words and likely requires additional action, both from monetary and, more importantly, fiscal policymakers.

Euro area inflation ticked down to a paltry 0.3 percent in September. A number of countries – including Greece, Italy, and Spain – are experiencing outright deflation.

]]>http://www.macleans.ca/economy/business/canada-stocks-tsx-correction-loonie-oil-snc-lavalin-manufacturing/feed/1Unilever announces closure of Ontario manufacturing planthttp://www.macleans.ca/economy/business/unilever-announces-closure-of-ontario-manufacturing-plant/
http://www.macleans.ca/economy/business/unilever-announces-closure-of-ontario-manufacturing-plant/#commentsThu, 08 May 2014 15:38:50 +0000The Canadian Presshttp://www.macleans.ca/?p=551951Plant in in Bramalea, Ont. to close and move to the U.S.

TORONTO – A Unilever plant in Bramalea, Ont., that manufactures dry mixes for soups, sauces and other foods will close and its production capability shipped to the United States, the company announced Thursday.

Most production is expected to finish by the end of next year with the final plant closure expected in March 2016.

John Le Boutillier, president and CEO of Unilever Canada, said the majority of the plant’s production will end up in the U.S.

“The decision to close the Bramalea plant came after a strategic review of the dry mix category in North America,” Le Boutillier said in a statement.

“As more than 80% of the volume produced at Bramalea is shipped to the United States, Unilever made the strategic decision to make its investment closer to where the bulk of the product is consumed.”

Le Boutillier said part of the decision was based on the large infusion of money into the dry-mix supply chain that would be required for the company to meet quality standards, customer service levels and future packaging innovations.

Production of the dry mixes from the Bramalea plant under the Knorr and Lipton brand names will move to Unilever’s plant in Independence, Mo.

The decision to close the plant will affect about 280 salaried and hourly employees.

Le Boutillier acknowledged the closure will hurt both employees and the community but said Unilever Canada is making significant investments in Canadian facilities which manufacture ice cream, margarine and mayonnaise products.

Those investments include upgrades and enhancements at other Ontario sites.

Amsterdam-based Unilever is one of the world’s major suppliers of food, home and personal care products, such as Dove soaps, with sales in more than 190 countries.

The company reported lower revenues for its first quarter due to the effects of the euro and a decline in North America.

It also said its foods arm, with Knorr soups and sauces and Hellmann’s mayonnaise, lagged.

]]>http://www.macleans.ca/economy/business/unilever-announces-closure-of-ontario-manufacturing-plant/feed/0Companies march to the beat of their own loonie tunehttp://www.macleans.ca/economy/companies-march-to-the-beat-of-their-own-loonie-tune/
http://www.macleans.ca/economy/companies-march-to-the-beat-of-their-own-loonie-tune/#commentsSun, 16 Feb 2014 19:57:26 +0000Chris Sorensenhttp://www.macleans.ca/?p=507563A close look at why the government thinks the plunging loonie will kick-start manufacturing

From labour agreements to government subsidies, Sergio Marchionne, the CEO of Fiat Chrysler Automobiles, has a lot to consider before deciding whether to build Chrysler’s next-generation minivan in Windsor, Ont.—a struggling city badly in need of the $2-billion project. But one thing the bespectacled Italian-Canadian auto executive isn’t paying attention to is the value of the loonie.

When asked about the impact of a weaker Canadian dollar at this year’s Detroit auto show, Marchionne noted that Chrysler has been operating in Canada with the loonie at or above par with the U.S. dollar for several years, but not long ago—2002 to be exact—it was worth as little as 62 cents. The point, he stressed, was that “there’s no way of knowing what it will be in 24 or 30 months.”

If the dollar’s value doesn’t enter into Marchionne’s calculations—with billions on the line—one has to wonder why policy-makers in Ottawa seem convinced Canadian firms will react differently. Bank of Canada governor Stephen Poloz has all but voted in favour of a weak loonie by continuing his dovish stance on interest rates, while Prime Minister Stephen Harper has dismissed the idea that the dollar’s drop is a negative development, despite making Canadians’ vacations more expensive and raising the cost of imported products. Finance Minister Jim Flaherty explained the government’s thinking in a recent TV interview when he said, “The dollar in the 90s somewhere is good for manufacturing.”

In theory, a cheaper currency should indeed make exporters more competitive since, all other things being equal, they can sell their products for less money in the U.S. without sacrificing profit. But in practice there are many reasons why that might not spur the sort of economic rebound politicians are hoping for. For one thing, exporters took steps to insulate themselves from a strong dollar over the past decade, including increasing the amount of raw materials purchased from the U.S., which are now more expensive. “For all I know, all [politicians are] doing is putting lipstick on a pig and making the best of a bad situation,” says Philip Cross, a senior fellow at the Macdonald-Laurier Institute, an Ottawa think tank. “It’s unlikely to make much of a difference to output and employment of export industries.”

Cross, a former chief economic analyst at Statistics Canada, says what’s really needed to revive manufacturing is a sustained recovery south of the border. “If the outlook for the U.S. was that great, I would expect to see improving commodity prices,” Cross says. “But we’re not seeing an improvement in metals and oil isn’t doing much better. So, if we’re looking to goose GDP and unemployment, we’re playing with the wrong variable.”

The parade of high profile manufacturing job losses in recent months would seem to underscore Cross’s analysis. In southern Ontario, food processors Heinz and Kellogg announced plans to shutter factories and lay off workers this year. In Quebec, Bombardier is laying off 1,700 employees as it looks to cut costs amid a tough market. Overall, Statistics Canada said manufacturing employment fell by 2.3 per cent in Canada last year—a period when the dollar fell by six per cent. And while January’s job numbers showed 29,000 net positions being added overall—a reversal from December’s surprise loss of 45,900 jobs—the manufacturing sector was still a net loser, shedding about 6,800 positions during the period.

The failure of Canada’s exporters to reap the benefits of a more favourable exchange rate, at least so far, has left observers scratching their heads. “The loss of competitiveness is something that concerns us,” said Roberto Cardarelli, the IMF’s mission chief to Canada, on a recent conference call. He added that Canada’s export sector may have suffered from some “structural sort of damage” after being subjected to a high exchange rate for 10 years.

Between 2002 and 2012, the country’s manufacturing heartland in Ontario shed nearly a third of its workforce, or just over 300,000 jobs. The steep run-up in the Canadian dollar, driven by the global commodities boom, squeezed exporters’ profits since they paid their employees and other expenses in Canadian funds, but sold their product in less valuable U.S. dollars. The global financial crisis only made matters worse by sapping U.S. demand for Canadian-made goods, while the loonie remained stubbornly stuck near par even as commodity prices waned. “Commodities are an important driver of the (dollar), but the currency can become disconnected from those fundamentals for long periods as we saw from 2009 to 2013,” wrote Bank of Montreal senior economist Benjamin Reitzes in a recent report. “The loonie was conspicuously overvalued over that entire period.” The culprit? Global investors who were drawn to the currency thanks to Canada’s relatively stable banking sector, hot housing market and healthy resource industry. Now that Canada’s growth is slowing, however, the so-called “hot money” has moved on to greener pastures.

But the loonie’s rise wasn’t the only factor speeding Canadian manufacturing’s decline. Industries like textiles and furniture-making also suffered from the off-shoring trend on both sides of the border as companies realized they could save money by shipping production to low-cost countries overseas without suffering a signi?cant loss in quality. Jayson Myers, the president of Canadian Manufacturers and Exporters, says the dollar’s weakness throughout most of the 1980s and 1990s likely had the effect of attracting industries that “competed on cost and volume” and therefore probably didn’t belong here in the first place.

Exporters have changed the way they do business, too. “What many companies did, as the dollar was going up, was take advantage of the higher dollar to import more raw materials and buy production facilities in the United States and Mexico,” says Myers. “So now that the dollar is coming down, that’s going to have an impact. It will mitigate some of the benefits that might otherwise have been there.”

Investments in labour-saving technology have similarly helped some Canadian manufacturers stay afloat, albeit at the expense of jobs. Cereal-maker Kellogg, for example, said in December that it will close an aging plant in London, Ont., where it has operated for 90 years, and move some of the production to a newer, more modern plant in Belleville, Ont. Other plant closures in the province have also seen production absorbed elsewhere in North America—part of an industry-wide push to do more with less. “Manufacturing investment was close to a record high last year,” says Cross. “But they weren’t building plants to expand capacity. Most of that was going into machinery and equipment, which is reflected in the steady drop in manufacturing employment. They have boosted productivity. It’s how they survived and stayed in business.”

Ironically, the one area of the export sector set to bene?t most from a falling loonie is the one that least needs help: resource companies. Unlike, say, auto assembly plants that must import vehicle parts from south of the border, miners and oil producers can’t source their raw materials from anywhere but beneath Canadian soil. “That’s why the stock market has done well over the past few months,” says Cross, referring to a 10 per cent climb in the resource-heavy S&P/TSX Composite Index. “It’s almost nothing but pure gain for these guys.”

For most manufacturers, though, the painful transition they experienced over the decade continues to loom large. Any additional profits realized from today’s more favourable exchange rate are just as likely to be socked away or spent on more labour-saving technologies—neither of which will spark manufacturing job growth. “There’s no clear sign now that there’s a strong recovery under way in the U.S., and that’s essential,” Meyers says. “So companies are holding on to the cash and waiting until customers return.”

As for Fiat Chrysler, it may well decide to build its new minivan in Canada, helping to save thousands of jobs. But it won’t be because the loonie is cheaper. It will be because taxpayers stuffed the automaker’s pockets with more of them.

Today’s release of the latest manufacturing data poked a hole in a narrative that was beginning to take hold of late, the one about a renaissance of manufacturing in Canada. After four straight months of improving sales, the latest numbers for December showed a decline of 0.9 per cent from the month before.

Many have been quick to point out that on a year-over-year basis, sales were still 2.7 per cent higher than the year before. But before getting too carried away with the story of manufacturing’s comeback, it’s worth looking at where the gains are coming from. And where they’re not.

Among Canada’s four biggest manufacturing provinces, the only ones to see gains last year were out west. And while Alberta’s growth wasn’t spectacular, the province has emerged as the biggest driver of Canada’s manufacturing sector in recent years. Over the last decade manufacturers in Alberta, a province with a factory sector less than one-third the size of Ontario’s, have more than made up for the declines in Canada’s largest province. The problem, for those hoping for a blue collar job renaissance, is Alberta factories have accomplished that sales feat without adding any additional manufacturing jobs.

While manufacturing sales in Ontario in 2013 were $25.9 billion lower than they were a decade ago, Alberta factories boosted their sales by $26.7 billion. This really is astonishing when you consider manufacturing is a $270 billion industry in Ontario, compared to just $75 billion in Alberta. But while there are 323,000 fewer workers in Ontario factories today than in 2003, there are 10,000 fewer in Alberta, too.

Part of Alberta’s jobless factory boom comes down to higher productivity in Alberta, but the biggest difference is the types of manufacturing that goes on in Ontario compared to Alberta, where two-thirds of factory business is tied to the energy sector. Building trains, planes and automobiles is simply a lot more labour-intensive than constructing pipes and processing raw materials.

Manufacturing isn’t a zero-sum game. Ontario didn’t lose because Alberta won. But if you’re in the camp hoping that improving manufacturing sales in Canada will revive job growth in that sector, history isn’t on your side.

For China, it was a brief respite after an uncomfortable stretch of sluggish growth. In November, factory exports surged nearly 13 per cent over the year before, as overseas-bound containers crammed with everything from smartphones to sweatpants gave China its biggest trade surplus in nearly five years. But while investors cheered, the uptick in economic activity could come back to haunt China’s new leadership in the year ahead, since it could once again distract from the need for long-overdue reforms.

Over the past decade, China has overwhelmingly relied on exports, as well as huge, debt-laden infrastructure projects—such as industrial parks, airports, high-speed rail systems, condos and subdivisions—to fuel eye-popping growth. In order to be sustainable over the long term, though, China must boost household consumption, which currently accounts for just 35 per cent of GDP, the lowest level of any major economy in the world. (By comparison, households account for 60 to 70 per cent of GDP in Japan, Germany, Hong Kong, the U.S. and Canada.) That will require convincing ordinary Chinese to unlock their savings and spend more on food, clothes and cars at home.

The trouble is, accomplishing the transition means China will almost certainly have to accept GDP growth far lower than the 10 per cent averaged over the past few decades, and perhaps even below the seven per cent annual target that’s been set for the next five years—easier said than done in a vast nation of 1.3 billion, where the promise of a better tomorrow has proven to be a unifying force, in spite of a widening gap between rich and poor. “I think there’s a recognition that there will be slower growth rates,” says Elizabeth Economy, the director for Asia Studies at the New York-based Council on Foreign Relations, a foreign policy think tank. “But if people continue to feel that the benefits of China’s economic growth, whatever it may be, aren’t being distributed evenly, and that their children won’t be able to do better than they did, then there’s going to be rapid rise in social unrest.”

The stakes for China—and the world—are high. When the engine of the global economy seized in 2008, it was Beijing’s massive $586-billion stimulus package that helped get things running again, and many world leaders are once again hoping a rebounding China can help pull the global economy out of its current funk. But economists have been warning for years that China’s strategy of investment-led growth is at risk of overstaying its welcome. Building new factories and other core infrastructure was once necessary to take advantage of China’s huge, untapped labour pool and meet rising global manufacturing demand. Now it just threatens the profits of existing factory owners by creating excess capacity in the system, threatening the jobs of millions of workers.

So it came as little surprise last month when, after four days of meetings, China’s new leadership, led by President Xi Jinping, released a document outlining a bold-sounding reform agenda for the next decade. Among other things, it promised a greater role for private companies in the Chinese economy, more market influence over prices and better access for foreign companies. A 60-point list of policy goals that was released later included ending the unpopular one-child policy for most parents—a reform that could be enacted as soon as 2014. The pronouncements excited investors, initially sending Hong Kong’s Hang Seng Index and the Shanghai Composite Index soaring. “China’s reform boat has finally set sail,” wrote Société Générale economist Wei Yao.

There were, however, few specifics on how, exactly, the reforms will be implemented. There were also several seemingly contradictory statements. Adam Wolfe, an analyst at Roubini Global Economics, noted in a report that China promised markets would play a “decisive” role in allocating resources, but also that the country’s state-owned enterprises would continue to play a leading role in the economy.

Nor are there any guarantees the central government will be able to force local governments to fall in line. “China, in contrast to many democracies, is often very good at developing a coherent plan of action at the very top,” Economy says. “Where things tend to fall apart is in the next stages. It’s two or three years before they are able to develop regulations to implement a given policy objective. And then you discover, six months later, that it’s not being implemented very well, and that, in fact, there’s a lot of resistance from local governments that the central government can’t seem to overcome.”

It should also be noted that similar reforms outlined back in 2003 under president Hu Jintao never materialized at any level. Wolfe says the reason usually given is that, prior to 2008, China’s economy was running so hot that there was little sense of urgency. After the crash, Beijing decided that getting people back to work was a bigger priority. He called it the “Goldilocks theory of economic reform.”

In Beijing’s defence, the task is truly daunting. Remaking China as a country built on innovation and consumption, while at the same time reducing the influence of all the various interests in the old system, will require literally dozens of simultaneous reforms and sub-reforms. They include developing a social safety net, fixing China’s underfunded pension system, developing an effective income-tax system and rooting out corruption, to name a few. “The problem is that they’re all interlocking and they need to happen simultaneously,” Economy says. “And all of them really require rejigging the bases of power. So, fundamentally, even if we’re talking about economic reform, it’s also political reform.”

Given the myriad challenges, forecasts for temporary relief in China’s manufacturing sector could be just the thing to make Beijing’s bitter medicine for the economy go down easier—or just another reason to put off reforms a little bit longer.

With its 1.5 million factory workers earning as little as $300 a month to make iPhones, laptops and PlayStations, the Chinese behemoth Foxconn has become a potent symbol of America’s manufacturing decline and the transfer of jobs to Asia.

Which is why so many are taking Foxconn’s recent announcement that it would invest $30 million to hire 500 workers for a new robotics factory in Harrisburg, Pa., starting in 2014—and possibly a second factory in Arizona—as proof of a stunning reversal of fortune for American manufacturing, an industry long ago written off as a casualty of globalization.

From 2000 to 2009, America bled nearly six million manufacturing jobs, or a third of its industrial workforce, as companies shifted production overseas. But over the past two years, the country has seen the green shoots of manufacturing’s rebirth. Since 2011, the U.S. has added 550,000 new manufacturing jobs, according to the Bureau of Labor Statistics, marking the first positive news for the sector since 1997. The renaissance isn’t concentrated in any one industry or region. In the past year, companies as diverse as General Electric, Dow Chemical and Apple have opened or announced plans for new production facilities in places ranging from Pennsylvania to California. Google, which purchased Motorola’s handset division, is making its Moto X smartphone in a shuttered Nokia factory in Forth Worth, Texas. China’s Lenovo, the world’s second-largest PC manufacturer, plans to make ThinkPad laptops in North Carolina, while last month, Apple said it will build a factory in Mesa, Ariz.

Foxconn says its plans are largely driven by the fact that its customers, American tech darlings such as Apple and Hewlett-Packard, are under intense public pressure to reshore production in the aftermath of the financial crisis. “We are looking at doing more manufacturing in the U.S. because, in general, customers want more to be done there,” company spokesman Louis Woo told Bloomberg.

Wal-Mart has similarly jumped on the made-in-America bandwagon. Earlier this year, the company pledged to spend $50 billion over the next decade to source more domestic products, which it will sell under the banner Made Here. “Labour costs in Asia are rising. Oil and transportation costs are high and increasingly uncertain,” Wal-Mart U.S. CEO Bill Simon told a manufacturing conference in August. “The equation is changing.”

Skeptics say such announcements are more about companies retooling their public relations efforts than their production lines. But beyond the good press generated from such announcements are the rapidly shifting economics of U.S. manufacturing, laid out in a series of influential reports by the Boston Consulting Group that predicted the U.S. would reach cost parity with China by 2015, and create as many as five million new jobs related to manufacturing by the end of the decade. The Manufacturers Alliance for Productivity and Innovation, an industry lobby group, forecasts the U.S. will create as many as 350,000 new manufacturing jobs next year alone, as more companies transfer production to American shores.

“What we’re seeing today is, frankly, the beginning,” says Michael Zinser, who co-authored the studies. “Companies are starting to take that long-term look even earlier than we might have thought. It’s happening quickly.”

Chinese wages are rising as much as 20 per cent a year, while U.S. wages have fallen in the aftermath of the financial crisis, he says. The shale-gas boom, which could potentially unlock more than two trillion cubic feet of natural gas, has helped drive down energy costs. Natural gas now costs roughly a quarter of what it does in China.

In a perverse twist, Zinser says America’s massive trade deficit with China is beginning to work in the country’s favour by lowering shipping costs. Freighters are arriving full of Chinese goods, but leaving empty, which has made it cheaper to get cargo space on ships heading back to Asia. Zinser says it now costs roughly as much to exports goods from the U.S. to China as it does to ship to China from Japan. “For better or worse, the U.S. actually has an advantage, when you think about sending product back overseas,” he says.

For manufacturers focused on the U.S. market, cutting out overseas shipping saves both time and money. For instance, market research firm IHS found it costs Google slightly less to manufacture the Moto X smartphone in Texas than it does for Samsung to make its popular Galaxy S4 smartphone in Korea. By using standardized parts and manufacturing at home, IHS found Google was able to get its phones into customers’ hands in as little as four days, compared to weeks for overseas manufacturers. Meanwhile, with assembly wages at the Texas plant starting at just $9 an hour, labour accounts for a mere five per cent of the total cost of making the Moto X.

Critics point out that manufacturers in low-cost southern states such as Texas have pushed wages too low in the drive to make the U.S. as cheap as China, a country with a far lower cost of living. Yet, as China’s cost advantage erodes, companies are becoming less tolerant of the headaches that come with manufacturing overseas: the late-night phone calls, expensive trips, shipping delays and long production lead times. “We’re not yet seeing lots of companies who are talking about just the economics about why they’re reshoring,” Zinser says. “It’s the quality, it’s the proximity to customers, it’s the ease of doing business in the U.S.”

Of the nearly 550,000 manufacturing jobs created in the last two years, just 50,000 were because companies shifted work from overseas, according to industry lobby group The Reshoring Initiative, which works with companies to move production back to the U.S. Many say the trend is really just a modest rebound from the dark days of the financial crisis, when 15 per cent of manufacturing jobs disappeared—the worst job loss of any single recession. “When you look at the losses in manufacturing that we had in the Great Recession, they were pretty astounding,” says Robert Atkinson, founder of the Washington think tank Information Technology and Innovation Foundation. “Now we’re getting a few back and people are like, ‘Oh my God, it’s manufacturing nirvana.’ It is largely just cyclical rebound.”

If U.S. manufacturing were undergoing a true renaissance, Atkinson says manufacturing output would be growing faster than the overall economy across a wide array of industries, and the country’s trade deficit would be shrinking because of rising exports. Instead, durable-goods shipments were up just 3.3 per cent in October compared to a year earlier, roughly equal to GDP growth. The country is running a $532.7-billion trade deficit for goods so far this year. Manufacturing exports are up just 1.5 per cent for the year, a pace that “remains frustratingly slow,” the National Association of Manufacturers’ chief economist Chad Moutray complained in a blog post in November. Atkinson says capital investment among chemical manufacturers, an industry that stands to benefit the most from the shale-gas boom, was actually lower this year than in 2007, before the financial crisis. “People want to believe in [a renaissance] so much that there’s a tendency to selectively look at the evidence to paint a more positive picture than is really there,” he says.

Still, even if evidence for a full-blown recovery is mixed, there’s a growing desire among today’s manufacturers to avoid repeating the mistakes of the past, says MIT political scientist Suzanne Berger, who has studied how manufacturers turn innovative research into a commercial product. When production leaves the country, innovation will eventually go with it, she says. That was the fate of America’s semiconductor industry, a technology developed in the U.S. but now designed and manufactured principally in Asia. “People followed each other overseas like lemmings, without really knowing what the costs would be,” she says. “There’s a lot more realism in the minds of manufacturing managers today.”

As an example of the new ways of thinking, Berger points to the National Additive Manufacturing Innovation Institute, a public-private partnership created last year with $30 million in federal funds and $50 million in private investment that brings together dozens of research institutes, training centres and thousands of large and small manufacturers in the northeast. Its goal is to explore industrial uses for 3D printing that could potentially enable manufacturers across a wide array of industries to make highly customized tools and parts for a fraction of the cost and time it takes to ship them from overseas. Foxconn’s decision to build a robotics factory in the region was due in part to the allure of such expertise.

Clusters that bring together a diversity of manufacturing industries can help strengthen the economy against future recessions, Berger says. “You would have firms that were suppliers for each other that have some overlaps, but would not all be doing the same thing. None of us are eager to repeat the one-industry towns that were really quite vulnerable to crisis.”

Such investments may take decades to pay off, if they ever do. In the meantime, even those who believe strongly that U.S. manufacturing is turning a corner understand that America’s new-found cost advantage is likely temporary. Chinese productivity is gradually catching up with the U.S. Other countries are actively looking to exploit their own natural gas reserves. Still more are researching 3D printing technology. Boston Consulting Group’s Zinser estimates the U.S. cost advantage can last another five or 10 years, a window of time that can easily be squandered without the right policies and investments. But, for the millions of unemployed workers who thought the industrial economy’s best days were behind it, the mere talk of a manufacturing renaissance is likely the greatest news they’ve had in years.

Between 2002 and 2008 Canada shed 328,000 manufacturing jobs. Why? The narrative we’ve all heard is that rising prices of oil and other commodities during the same period sucked away those jobs and channeled them into the booming resource sector. Tom Mulcair and others called this Canada’s version of the Dutch Disease, with a high loonie hollowing out our domestic goods-making industries. University of Laval economist Stephen Gordon, a regular Econowatch voice, has shown that the labour market shift has pushed up wages in both Canada’s oil fields and its factories, leaving everyone better off.

There is no question that the resource boom was a main driver behind the shrinkage in manufacturing employment. But what if there was something else at work as well?

Some economists looking at Europe think that something might be the real estate sector. Balázs Égert and Rafa? Kierzenkowski, two senior OECD economists, argue ballooning property prices in France might be part of the reason why manufacturing employment dropped — much the way it did in Canada — in the mid 2000s.

Between 2000 and 2007 the trajectory of house prices and that of production prices in the manufacturing diverged sharply, with the first soaring upwards. With business booming, the French construction sector found itself short of workers, and wages in the industry shot up. Égert and Kierzenkowski believe many of the warm bodies that filled construction jobs and helped sustain the housing rally came from the manufacturing sector. And since construction had much higher net operating profits, capital probably moved in the same direction.

Based on econometric analysis they then conclude that the resource re-allocation from export-oriented manufacturing industries into real estate has hurt France’s export performance, which has been sluggish for the past 10 years or so:

We add a relative price variable intended to capture the movement of labour and capital between the manufacturing sector and the sectors of construction and real estate activities. This takes the form of the ratio of house prices relative to producer prices in the manufacturing sector. We find this new variable to be a robust determinant of French exports.

By contrast, the two economists venture, Germany’s declining house prices might have helped boost that country’s manufacturing sector and exports. And, though they caution that their findings warrant “further investigation,” they also wonder out loud whether the same trend of housing booms weighing on export growth, could be true for a number of advanced economies, including Canada.

(In case you can’t read the legend on the blurry charts: The black line is export levels; the dashed one the size of the “export market,” defined as domestic exports that would be expected if a country’s market share by volume remained constant — the reference year here is 2005; and the dotted line represents the ratio of house prices relative to manufacturing producer prices.)

Now, the parallel between France and Canada has obvious limits. Yes, both countries experienced ballooning housing prices and slow-growing exports roughly at the same time. But Canada’s resource shuffle channeled much capital and labour toward the export-oriented resource sector.

Still, Égert and Kierzenkowski’s argument does point out that oil and gas and the mining wasn’t the only booming industry in Canada between 2002 and 2008. Housing staged a spectacular rally, and in a free-market economy capital and labour move toward sectors with higher returns. It seems obvious when you say it, but I’ve never heard anyone before mention the housing market when discussing the decline in manufacturing employment.

]]>http://www.macleans.ca/economy/business/did-high-home-prices-push-down-manufacturing-employment/feed/3Why Canadian factories are losing out to the U.S.http://www.macleans.ca/economy/business/why-canadians-factories-are-losing-out-to-the-u-s/
http://www.macleans.ca/economy/business/why-canadians-factories-are-losing-out-to-the-u-s/#commentsMon, 23 Sep 2013 17:17:00 +0000Tamsin McMahonhttp://www2.macleans.ca/?p=423971Old cost advantages are gone and it's time for innovation

When Swedish appliance giant Electrolux announced it was moving production of its high-end stoves and ovens from Quebec to Tennessee, it was a scene that has become painfully familiar in Canadian manufacturing. In an employee gathering less than two weeks before Christmas of 2010, Billy Benson, Electrolux’s North Carolina–based vice-president, told workers that the plant in L’Assomption, outside Montreal, “operates at a cost disadvantage relative to what’s available in other markets.” Production, he said, would be phased out by the end of 2013.

Benson’s announcement was in English, but for the plant’s 1,300 predominantly francophone workforce, the message was clear: The factory, which makes appliances for brands such as Frigidaire, would be shuttered. With it would go the last of Electrolux’s Canadian manufacturing operations, which at one time had included factories in Montreal and Cambridge, Ont.

The news was a blow to the community. Nearly half of Electrolux’s L’Assomption employees were over 40, and roughly 80 per cent had only a high school education. The local economic development agency paid to supply a full-time social worker inside the plant after hearing reports that eight workers had attempted suicide. News of the closure was also met with a sense of bitter irony. The factory had narrowly avoided being shut down decades earlier, when Electrolux decided to close a plant in Tennessee and send those jobs to what was then low-cost Quebec. These days, the fate of Quebec’s manufacturing is coming full circle. Canada is now considered the most expensive place in North America for manufacturers, while a recent study by the Boston Consulting Group found that Tennessee had become “among the least expensive production sites in the industrialized world.”

Manufacturers have been flocking back to the U.S., adding 500,000 new jobs in the past three years, and are expected to add another 1.2 million by the end of the decade. Meanwhile, Canada is continuing to bleed factory positions. Since 2006, it has lost more than 355,000 manufacturing jobs—80,000 in the past year. Canada’s automotive industry has been particularly hard hit, and it’s unlikely to see a resurgence any time soon, says George Magliano, head of North American automotive research for IHS Global Insight. In 2000, Canada produced nearly 17 per cent of the 17.2 million light cars and trucks in North America. By 2020, he says, when production is expected to hit a new record of 18 million cars and trucks, Canada’s share of that will fall to just 10 per cent.

The picture in Quebec, where the manufacturing base is more diversified than in auto-heavy Ontario, is equally dim. Manufacturing’s share of the province’s GDP is expected to fall from close to 24 per cent in 2000 to less than 15 per cent in 2015. Employment has fallen even faster, from close to 20 per cent of Quebec jobs in 2000 to 13 per cent in 2010.

More worrying is that Canada’s high dollar appears to be only part of the problem. Other traditional advantages over the U.S.—lower health care costs, cheap energy and competitive corporate taxes—have been eroded as American states and cities become more aggressive in the race to secure jobs. For manufacturing to survive at all in Canada, firms are having to adapt to a new world order, one in which they compete for highly specialized production, using skilled workers and advanced technology.

Local officials in L’Assomption say news of Electrolux’s closure came as a shock. But it’s now clear the company long had plans to move. It suffered a bitter labour dispute a year earlier with the plant’s union, the International Association of Machinists and Aerospace Workers, and was due for a new round of collective bargaining this year. At least three months earlier, the company had started soliciting bids among several U.S. states and Mexico under the code name “Project Journey,” according to an investigation by the Commercial Appeal, a newspaper based in Memphis, Tenn.

Enter Memphis, struggling with high unemployment and anxious to rebuild its industrial base. Its offer to Electrolux included a brand new $190-million factory paid for almost entirely with public money, generous tax breaks and a non-unionized workforce willing to work for a starting wage of $13.50 an hour compared to a base wage of $19.28 in Quebec. Not only would the municipal government help recruit the 1,200 employees, it would pay to train them at a local community college.

In total, the package was worth as much as $300 million, or nearly $200,000 per worker. That’s more than the Canadian government’s entire $200-million fund for advanced manufacturing in Ontario, announced in this year’s budget. It was also far more generous than anything local authorities in L’Assomption could possibly offer, says Stephane Paré, director of business services with L’Assomption’s economic development agency.

While Electrolux was forced to repay $2 million worth of subsidies to the Quebec government when it announced it would leave the community, its cash from Tennessee came with no strings attached. “We’re seeing all the businesses going back to the States, mainly because the government over there is giving out really good packages for businesses to come back,” says Paré.

Incentives were just one of the factors at play in the company’s move. Electrolux spokesperson Eloise Hale says the company shifted production to Tennessee because it already had a second assembly plant nearby, which helped lower transportation costs among suppliers and to its retail customers, most of whom are in the U.S.

There is a third issue that contributed to the closure of the L’Assomption plant, says Howard Silverman, a site selector who has worked with manufacturers in Quebec, including Electrolux. It’s one that presents a more urgent problem for manufacturers. For decades, Silverman says, local management at the plant had relied on the cheap Canadian dollar to boost its profit margins while letting the factory and its equipment fall into disrepair. By 2010 it had fallen so far behind, he says, it was nearly impossible to compete with a brand new state-of-the-art facility in Memphis. “That plant, five years ago, had bricks falling off the roof,” he says. “It had very qualified people, but old equipment, old everything. So how do you catch up over five or 10 or 15 years of lack of investment? You end up getting closed.”

Even as Canada’s currency advantage began to erode, which has been happening steadily for the past decade, manufacturers stuck to the idea that they could compete solely based on a return to a cheap dollar. “We were in a power play all the time. We had five men on the ice and our competitors had four,” says Louis Duhamel, a partner with Deloitte Canada who has been holding a series of workshops for Quebec manufacturers this year. “Of course we were winning a lot of games. But now we’re playing five against five. It was very hard for manufacturers to envision that. We were too dependent on that.”

Between 2002 and 2009, investment in new machinery at Canadian manufacturers declined by two-thirds, he says, even as the steadily rising Canadian dollar made it cheaper to import new technology. In 2001, Quebec manufacturers spent an average of $1 million a year on R&D. By 2006, that had fallen to $600,000. Manufacturing’s share of total business investment in the province went from 18 per cent in 2000 to just four per cent by 2010.

Duhamel says Canadian manufacturers have begun to recognize that the old cost advantages are gone, likely for good. Manufacturing investment in new equipment and technologies has been steadily rising since 2010. In Quebec, it has jumped by more than 50 per cent in the past three years to $5 billion.

In the future, we’ll most likely see more traditional assembly jobs flee the country for cheaper destinations. But in their place will be new opportunities for Canadian manufacturers to capitalize on our other strengths, such as a highly educated workforce, smaller and more specialized factories and a growing expertise in industrial software and automation. “Yes we lost some jobs, but maybe those are the jobs that we would have lost anyway,” says Duhamel.

To see what the future of Canadian manufacturing might look like, take a drive 90 minutes northwest of L’Assomption to GE Aviation’s factory in Bromont, Que. For more than 30 years, the plant has made blades and other components for the engines of commercial turbo jets such as the Boeing 737 and Airbus A320.

It was historically a foundry where workers heated, stamped and polished metal under gruelling conditions. These days, nearly a third of the production at the plant is done by robots, making the facility the most automated within GE Aviation. Last month, GE CEO Jeffrey Immelt landed his corporate jet at the Bromont airport to cut the ribbon on a new $61.4-million R&D centre for robotics and automation. Technology developed in Bromont will be exported to GE’s more than 80 aerospace facilities across the globe.

The plant is in the process of adding 60 new employees to its 650-person workforce. Most are skilled engineers and technicians who will develop manufacturing robotics to meet the demands of the next generation of jet engines, which must be lighter and more fuel efficient, requiring important changes to the structure of their components. “We’re to the point where it can no longer be manually done,” says Alain Ouellette, the Bromont facility’s director of operations.

The new research facility is looking to develop intelligent robotics systems that will not only perform a single task over and over—what manufacturers call “pick and place”—but will incorporate visual inspection technology to detect problems and then correct them. For instance, a robot could inspect an engine compressor blade for imperfections invisible to the human eye. If it found any, rather than tossing the blade aside, it could generate a diagnosis and then rework and retest the blade until it was flawless.

Despite the shift from humans to robots, Ouellette says the plant has roughly the same number of workers as it did a decade ago, although they now produce 50 per cent more parts. Where once an employee may have sat at a work station and held a metal blade to a rotating polishing wheel, he’s now monitoring the computer that polishes the blade, preparing the next components for production and inspecting the finished product.

In a world where policy-makers call for more manufacturing workers to have degrees in science and engineering, production employees at GE in Bromont are still only required to have a high school diploma.

While the company has hired engineers to design and repair the robots, it is training its existing workforce on how to operate them. Many have been trained to operate more than one robot, Ouellette says, adding to the plant’s productivity. “We’ve never laid off anyone here because of automation,” he says. “If anything, we’ve brought in more work. It makes you more competitive on the market. It brings new investments. It gets the wheel rolling.”

Nor has it been difficult to find skilled workers, he says. Bromont is surrounded by five engineering schools, and employee turnover in Quebec has traditionally been low as workers prefer to stay in their home province. Ouellette wouldn’t disclose how much workers at the facility are paid, but said it’s competitive with salaries in the Quebec aerospace industry.

This type of advanced manufacturing holds the greatest promise for Canadian businesses, says Silverman. While we can’t compete with the U.S. in industries that survive on cheap manual labour, our skilled workers often come at a discount compared with their American counterparts. Students might graduate from top engineering schools in the U.S. with $300,000 in debt and will demand high salaries because of it, he says. In Canada, an engineering student might leave school with $50,000 in student debt and be willing to take a lower salary. “We are very competitive on the high end,” he says. “Our students don’t have the expectations that these people do who are in debt from the day they leave school.”

Canadian plants also tend to be smaller than their U.S. counterparts because of our smaller market. That has given Canadian manufacturers a unique expertise in retooling plants for short production runs, making it easier to compete for more specialized work in niche markets.

Silverman points to Bridgestone’s tire factory in Joliette, Que., which a decade ago faced closure as production was being shipped off to low-cost Indonesia. Instead, it invested in technology to do shorter production runs of specialized tires. It now makes more than 40 different types of tires for cars, trucks and SUVs—up from 19—some costing upwards of $300 apiece. “It’s the salvation of manufacturing in Canada,” Silverman says. “We can’t compete with low-cost countries and low-cost states for a particular type of manpower. We can compete with mid-range and high-end manpower, provided we have the technology.”

That’s what Paré hopes is in store for the future of manufacturing in L’Assomption. The economic development agency is doing a study, to be released early next year, on exactly what kind of manufacturing it would like to attract to fill the void left by Electrolux. But he says it will hopefully involve a variety of smaller manufacturers, each employing 50 to 100 people and engaged in more specialized, high-tech work. “We’re trying to leave the traditional manufacturing behind,” he says.

In the meantime, L’Assomption’s Electrolux plant is still humming. Its closure is now tentatively set for December of next year. A few employees have retired and others have found new jobs. But so far all have been replaced and the plant is actually hiring an additional 50 employees. The Memphis plant has hired close to 400 workers and is still in testing phases. Production there is slated to begin next June.

Paré is not optimistic the community will be able to attract enough jobs to employ all the workers who will eventually be laid off. That will likely mean many of the families who have existed for generations on the promise of well-paying factory work will be forced to leave. Those who stay will almost certainly end up with jobs that pay less than they made before. “For sure the people working in Electrolux will find jobs in the short term,” he says. “But the same advantages? The same salary? Probably not.”

One of our favourite economists, Stephen Gordon, has a new paper on Dutch Disease and the manufacturing sector in Canada. Here’s the summary.

High-profile complaints about so-called Dutch disease have led many to question if industry in some parts of the country is suffering due to the success of the natural resources sector in others. This paper considers changes in manufacturing employment from 2002- 2008, a time of increased commodity prices. At first glance, the figures appear alarming — Canada shed 328,000 manufacturing jobs during that period — but the decline wasn’t entirely commodity-driven. Canada is the sole G-7 country in which manufacturing is on par with what it was 40 years ago; manufacturing employment rose in the decadeprior to the decline thanks to government austerity, which spurred monetary easing, making industry more export-competitive. Much of the contraction from 2002-2008 was a natural reaction to this unsustainable situation. Higher commodity prices in the same period actually had a benign — if not positive — effect on Canada’s manufacturing industry, notwithstanding the fall in employment. The manufacturing jobs that were lost were typically low paying, and were offset by the creation of betterpaying employment in other sectors. The available data on gross employment flows suggest that the disruptions associated with the shift of employment out of manufacturing were surprisingly small. The reduction in employment was largely achieved through attrition; layoff rates held steady while hiring rates fell. Moreover, the data are not consistent with fears that the manufacturing sector was hollowed out. Research and development activities held steady and investment in new technology continued togrow, leaving the manufacturing sector healthier in 2008 than it was in 2002.

]]>http://www.macleans.ca/politics/ottawa/local-economist-makes-news/feed/3Manufacturing continues to struggle as output unexpectedly falls in Junehttp://www.macleans.ca/general/manufacturing-continues-to-struggle-as-output-unexpectedly-falls-in-june/
http://www.macleans.ca/general/manufacturing-continues-to-struggle-as-output-unexpectedly-falls-in-june/#commentsFri, 16 Aug 2013 15:49:31 +0000The Canadian Presshttp://www2.macleans.ca/?p=413940OTTAWA – Canada’s factory sector continues to largely miss out on the economic expansion, suffering an unexpected downturn in June that will likely drag down growth during the just past…

OTTAWA – Canada’s factory sector continues to largely miss out on the economic expansion, suffering an unexpected downturn in June that will likely drag down growth during the just past quarter.

Statistics Canada reported Friday that manufacturing sales fell a 0.5 per cent to $48.2 billion during the month, falling short of the consensus estimate of a modest 0.3 per cent gain, and revised the previous two months down.

The news was worse in terms of volumes, which directly impacts economic output, as production fell 1.3 per cent.

“Weakness in manufacturing sales in June is disappointing, particularly given that little of the weakness appears to have been the result of temporary disruptions due to severe flooding in Alberta in the month,” said economist Nathan Janzen of the Royal Bank, noting that in Alberta, sales rose 0.1 per cent.

The major weakness came in manufacturing’s heartland as sales fell 1.9 per cent in Ontario, with miscellaneous manufacturing responsible for the lion’s share of the decline. Motor vehicle parts were also slightly weaker

“Along with a drop in construction activity caused by a strike in Quebec, the expected decline in mining activity and today’s weakness in manufacturing are consistent with our expectation that GDP fell by 0.3 per cent in June, down from a 0.2 per cent gain in May,” Janzen added in a note to clients.

Statistics Canada noted factory sales have been slowly falling since the spring of 2012. During the second quarter alone, sales fell 3.2 per cent, the fourth consecutive decline.

Manufacturing is one of the few sectors that has yet to fully recover all the output, or jobs, lost during the 2008-09 recession.

The big losses in June came in the miscellaneous manufacturing sector, which plunged 20 per cent, while fabricated metal products fell by 6.5 per cent, and wood products by 7.7 per cent.

They were partly offset by a 7.4 per cent gain in the petroleum and coal industry.

Statistics Canada said sales fell in 16 of 21 industries, representing about 56 per cent of the manufacturing sector.

Analysts have been hopeful of that manufacturing will regain momentum as the United States, by far the largest foreign market for Canadian exporters, recovers and demand for such products as homes and autos rises.

Scotiabank economists pointed out that most of the forward-looking indicators in the manufacturing report — new orders up 2.5 per cent, unfilled orders up 2.7 per cent and inventories down 0.2 per cent — pointed to stronger sales down the road.

The Bank of Canada is also counting on a U.S. revival, along with a temporary rebound in construction following the Quebec strike and rebuilding from the Alberta floods, to boost economic activity by a strong 3.8 per cent this quarter, which began in July. The bank believes growth with settle to about 2.7 per cent for the next two years.

So Dutch consumers are roughly 10% better off than they would have been, but companies have been able to compete only by paring their profit margins.

“The Dutch disease,” The Economist, November 26, 1977

Talk about burying the lede. That sentence appears at the end of the 10th paragraph of the much-referred-to but rarely read article in The Economist that coined the phrase “Dutch Disease.” In the normal course of things, a 10 per cent increase in consumers’ purchasing power would be the stuff of banner headlines, but, for some reason, The Economist chose to hide that point deep into the story and qualify it with a caveat about how hard it had become for companies to compete. (The answer to that, by the way, is: “So what if producers are struggling?” What really matters is consumer welfare.)

My take on the Dutch Disease debate can be summed up as follows: Why are we calling it a disease?

The Economist was reporting on the difficulties Dutch manufacturers were having in the wake of the discovery and exploitation of natural gas reserves in the Netherlands in the 1970s. The parallels with the recent Canadian experience are obvious: the surge in the prices of oil and other commodities that began in 2002 has been accompanied by a fall in employment in the Canadian manufacturing sector. (Here I’m going to concentrate on the period 2002-2008; the recession complicates the analysis of the last four years.)

No-one can plausibly deny that the increase in resource prices during 2002-2008 led to a reduction in manufacturing employment. But this shift was part of a labour market adjustment that produced broad-based increases in wages and incomes — and broad-based increases in wages and incomes are good things.

The rest of this post is based on a presentation I gave at a the symposium on Dutch Disease organised by the University of Calgary’s School of Public Policy held in Toronto on March 6-7. (It was there that the University of Alberta’s Andrew Leach drew my attention to that remarkable quote.)

The Dutch Disease story is one of sectoral shifts. Let me explain. Suppose, for now, that there are only two sectors in the economy: manufacturing and resources. (If this level of abstraction bothers you, replace “resources” with “non-manufacturing” in what follows.) If people can work in either sector, wages will be the same in both — otherwise, workers would move to the sector that pays more.

Now suppose that world demand for Canadian resources increases. This increases the demand for labour in the resources sector:

The blue lines are the demand for labour in the two sectors (higher wages reduce the quantity of labour demanded) and the red lines are the supply of labour (higher wages increase the quantity of labour supplied). Market-clearing wages and employment are at the intersection of the labour demand and supply curves — where supply equals demand and there’s no excess supply or excess demand. Before the shock, wages and employment are at levels denoted by the 0 subscript.

The immediate effect of the increase in the demand for labour in the resources sector is to produce upward pressure on wages in the resource sector. Some people stop the story there and conclude that the only people who benefit from high commodity prices are those who work in the resource sector, but this is obviously an incomplete analysis. Manufacturing workers will notice the higher wages on offer in the resource sector and react by moving from manufacturing to resources:

The arrival of new workers in the resource sector attenuates the wage increase there, and — this is the important bit — the departure of workers from the manufacturing sector increases manufacturing wages. The shift of workers from manufacturing to resources will continue so long as the resource sector offers higher wages. When wages are equalized across sectors — at w1 — there is no reason to move from one sector to the other. Note also that w1 is higher than w0: an increase in labour demand in one sector increases wages in both sectors.

Here are the main predictions of the sectoral shifts story:

Employment in the manufacturing sector falls

Employment outside the manufacturing sector increases

Wages increase in both the non-manufacturing and manufacturing sectors

The first prediction obviously fits the data: according to the Labour Force Survey, manufacturing employment fell by 328,000 between 2002 and 2008. So does the second: even though manufacturing employment fell, unemployment rates hit record lows and employment rates hit record highs during Canada’s Dutch Disease period. And here’s what happened to real wages:

The Dutch Disease period was a time when real wage growth accelerated after decades of sluggish improvement: the increase in median real wages in the six years after 2002 was the same as the increase observed over the preceding 18 years. As far as consumer welfare goes, this is a much more important statistic than the number of manufacturing jobs lost over the period.

There is one curious thing though: manufacturing wages are generally higher than wages in other sectors. How can a decline in employment in a high-paying sector generate an increase in overall wages? The answer is that the manufacturing jobs that disappeared were generally low-paying. (The numbers in the tables are calculated from the Public Use Microdata Files of the Labour Force Survey.)

Hourly wages: 2012 dollars

All jobs:
2002

Manufacturing jobs:
2002

Lost manufacturing jobs:
2002-2008

Mean hourly wage:

$21.49

$22.39

$18.00

Median hourly wage:

$19.05

$20.42

$16.50

Interquartile range:

[$12.53 , $27.38]

[$14.60 , $27.98]

[$11.58 , $24.08]

(The interquartile range spans the middle 50 per cent of the distribution: its lower bound is the 25th percentile and its upper bound is the 75th percentile.)

The lost jobs were not only relatively low-paying compared to the rest of the manufacturing sector, they were low-paying relative to the economy as a whole. Again, this is consistent with a sectoral shifts story in which workers leave the manufacturing sector in search of higher wages elsewhere.

The next question is whether or not the new jobs created in the non-manufacturing sector did in fact pay better than the manufacturing jobs that were lost. For the most part, they did:

Net change in employment: 2002-2008
(Thousands)

Manufacturing

Non-manufacturing

Total

Lowest quartile
(under $12.53/hr)

-142.5

-140.8

-283.3

Second quartile
($12.53/hr – $19.05/hr)

-80.3

550.0

469.8

Third quartile
($19.05/hr – $27.38/hr)

-49.0

740.1

691.1

Highest quartile
($27.38/hr and up)

-56.5

968.4

911.9

Total

-328.3

2117.8

1789.5

The lost manufacturing jobs are mainly concentrated in the bottom part of the wage distribution, and the new non-manufacturing jobs are mainly concentrated in the top part of the distribution. This doesn’t mean that no high-wage manufacturing worker ended up at a low-wage non-manufacturing job, but it does mean that those transitions were not representative of what was going on during the shift out of manufacturing.

There’s another point to consider that I cover in my presentation: the mechanics of the transition. I may get to this later, but for now suffice it to say that the reduction in manufacturing employment between 2002 and 2008 was brought about by attrition: layoff rates held steady while hiring rates fell.

So why does an income-boosting shift of workers from one industry to another get such a bad name? I blame the editors at The Economist. A phenomenon that increased consumers’ buying power by 10 per cent should never have been called a “disease.”

The debate over “Dutch Disease” tends to focus almost entirely on what happened in Canada between the oil price surge in 2002 and the onset of the recession in 2008. Employment in the manufacturing sector fell by more than 300,000 during this period, but this number is almost never put into context.

Firstly, the share of people employed in manufacturing has been on a secular decline in industrialized countries for at least the last forty years:

It’s worth pointing out that this trend was established several decades before Chinese manufactures appeared on world markets.

Here are manufacturing employment levels, scaled so that all countries are equal to 100 in 1971 :

Canada is the only country in these graphs where manufacturing sector employment is still on par with what it was forty years ago in absolute terms. (The bump you see in the Canadian data from, roughly, 1995 to the late 2000s will be the subject of an upcoming post.)

The most important thing to note is that the manufacturing employment cycle has been going on for decades. We’ve seen this before, and we’ll doubtlessly see it again.

The Scene. The day’s prize for Inventiveness in Partisanship goes to Joyce Bateman, the Conservative MP for Winnipeg-South Centre, who, in standing to ask the Foreign Affairs Minister about the appointment of a new ambassador to China, somehow managed to accuse the NDP of proposing a “job-killing carbon tax.”

Any backbencher, having been duly awarded one of the highest honours a group of voting-age citizens can bestow on another, can stand and publicly proclaim the party line. But only the truly exceptional can do so in reference to something completely unrelated. Bravo Madame. You have established an impressive standard that will be difficult to match. Not that we should underestimate your colleagues. Especially when they might have three years to match or exceed your accomplishment.

For sure, you should probably settle in because this joke is probably going to take at least that long to tell (or, put another way, it will probably be for at least that long that the Conservatives will continue telling it).

“Mr. Speaker, with 300,000 more Canadians unemployed today than before the crash of 2008, a record $50-billion trade deficit and the highest household debt in Canadian history, the Conservatives’ solution is to send the Minister of Finance to lecture business leaders,” Thomas Mulcair reported this afternoon at the outset of Question Period, “but Canadian business leaders are voting with their wallets and holding off on new investment. They are sitting on over half a trillion dollars in dead money.”

The Prime Minister was listening enough that he knew it was now his turn to stand.

“Mr. Speaker, as I have said repeatedly, we all know that there are great challenges in the world economy that affect this country,” he offered. “With that said, Canada’s economic performance continues to be far superior to that of most other developed countries. The number of jobs is up by more than three-quarters of a million, investment is up, exports are up and growth is up.”

Mr. Harper now waved his hand in the general direction of the New Democrats.

“We will make sure that we resist any ideas for carbon taxes, for tax increases, for shutting down industries and for blocking trade,” the Prime Minister declared. “This government is committed to the growth and prosperity of this country.”

The Conservatives stood to cheer this commitment.

Mr. Mulcair had a retort. “Mr. Speaker, our priority is jobs,” he clarified. “The Conservatives’ priority is making up stuff about the NDP.”

The New Democrats applauded, the Conservatives grumbled.

The NDP leader switched to French and the Prime Minister followed suit, only to return to English halfway through his response.

“Let me just say this,” he said. “I do not have to make up anything about the NDP. I have here, in black and white, black and white, its platform from the last election.”

He held in his hand a piece of white paper.

“There is a little table at the end,” he reported, “which states, “Cap and Trade Revenues By Year, $21 billion. Be a part of it.”

The Conservatives stood to cheer their man’s reading.

You would perhaps be tempted here to interject and point out that the Conservative party’s 2008 platform also included a commitment to cap-and-trade. But you would be interjecting too hastily. You see, the Conservative party’s 2008 platform is written in blue ink. And it is a widely accepted convention of civil law in this country that that which is written in blue isn’t binding. You might’ve thought the blue ink was simply a nod to the Conservative brand. But it was actually a way of ensuring that, should the Conservatives ever decide to completely repudiate a concept they once endorsed, they could not be held responsible for the previous commitment.

Mr. Mulcair disregarded Mr. Harper’s evidence entirely. “Mr. Speaker, after seven years of Conservative corporate tax cuts, the Conservatives have nothing better to offer than more lectures to Canadian businesses, but despite their finger-wagging Canadian businesses are sitting on over half a trillion dollars in dead money,” he charged. “Even the Canadian Manufacturers & Exporters have said that Conservative corporate tax cuts have had little observable impact on new investment in Canada.”

“Woah!” mocked the New Democrats.

“What,” Mr. Mulcair asked, “will it take for the Conservative government to finally change course?”

In response, Mr. Harper stood and demonstrated his own deference to manufacturers. “Mr. Speaker, under our government, our record of growth continues to be superior. Taxes are down not just for business, they are down for individuals, they are down for families. In every case, the NDP voted against those tax cuts. We have voted for them,” he first reviewed. ”The manufacturing sector can speak for itself. Let me read what the president of Patriot Forge, a manufacturing company in southwestern Ontario, just said. He stated: ‘The higher taxes proposed by the NDP will make it much more difficult for our Canadian plants to compete….’ ”

The man from Patriot Forge having spoken, the matter should obviously be considered closed.

The Stats. Employment insurance, 11 questions. Foreign investment, five questions. The environment, four questions. The economy and food safety, three questions each. The Parliamentary Budget Officer, seniors and abortion, two questions each. Foreign affairs, pensions, prisons, Canadian Forces, privacy, foreign aid and the Quebec City armoury, one question each.

]]>http://www.macleans.ca/politics/ottawa/the-commons-stephen-harper-explains-why-his-2008-platform-was-written-in-blue-ink/feed/21Balancing the economyhttp://www.macleans.ca/politics/ottawa/balancing-the-economy/
http://www.macleans.ca/politics/ottawa/balancing-the-economy/#commentsFri, 14 Sep 2012 16:28:15 +0000Aaron Wherryhttp://www2.macleans.ca/?p=293807Thomas Mulcair talks to the Toronto Star.
“We’re always going to have a resource-based economy. We always have had and always will have . . . We also had a …

“We’re always going to have a resource-based economy. We always have had and always will have . . . We also had a very strong secondary sector. We built up manufacturing. Those were choices that were made,” Mulcair said in an interview Thursday. “We’re killing off that balanced economy and it’s really having devastating effects in regions like southwestern Ontario,” he said…

And he pinned the blame on a Conservative government he says hasn’t done enough to preserve manufacturing jobs. “Because of their belief that governments have no role in maintaining a balanced economy, they have completely ignored what is happening,” Mulcair said. “They can put out all the arguments they want but there’s a reality out there that since they came to power, we’ve lost several hundred thousand good-paying manufacturing jobs,” he said.

]]>http://www.macleans.ca/politics/ottawa/balancing-the-economy/feed/17Carney questions the diagnosishttp://www.macleans.ca/politics/ottawa/carney-questions-the-diagnosis/
http://www.macleans.ca/politics/ottawa/carney-questions-the-diagnosis/#commentsFri, 07 Sep 2012 18:17:33 +0000Aaron Wherryhttp://www2.macleans.ca/?p=290953Mark Carney takes on the Dutch Disease debate.
Some regard Canada’s wealth of natural resources as a blessing. Others see it as a curse. The latter look at the global …

Some regard Canada’s wealth of natural resources as a blessing. Others see it as a curse. The latter look at the global commodity boom and make the grim diagnosis for Canada of “Dutch Disease.” They dismiss the enormous benefits, including higher incomes and greater economic security, our bountiful natural resources can provide. Their argument goes as follows: record-high commodity prices have led to an appreciation of Canada’s exchange rate, which, in turn, is crowding out trade-sensitive sectors, particularly manufacturing. The disease is the notion that an ephemeral boom in one sector causes permanent losses in others, in a dynamic that is net harmful for the Canadian economy.

While the tidiness of the argument is appealing and making commodities the scapegoat is tempting, the diagnosis is overly simplistic and, in the end, wrong. Canada’s economy is much more diverse and much better integrated than the Dutch Disease caricature. Numerous factors influence our currency and, most fundamentally, higher commodity prices are unambiguously good for Canada. That is not to trivialise the difficult structural adjustments that higher commodity prices can bring. Nor is it to suggest a purely laissez-faire response. Policy can help to minimise adjustment costs and maximise the benefits that arise from commodity booms, but like any treatment, it is more likely to be successful if the original diagnosis is correct.

Last month, someone on the AR15 firearms message board boasted that they used a 3D printer to create a working .22 calibre gun. “It’s had over 200 rounds through it so far and runs great,” they wrote. Known as HaveBlue, the user claimed the gun was printed in plastic and cost a mere $100 in materials to manufacture.

“To the best of my knowledge, this is the world’s first 3D printed firearm to actually be tested, but I have a hard time believing that it really is the first,” they added.

3D printing, also known as “additive manufacturing,” is a term for building objects by laying down successive layers of material. A 3D printer starts with the bottom layer, waits for it to dry or solidify, and then works its way up. The process can vary depending on the printer and the material; most 3D printers work with things like plaster, polymer or resin, but some can even make things out of metal.

*If you haven’t watched a 3D printer video yet, watch this one:

To date, 3D printing has been used mainly in industrial circles for rapid prototyping, and speculation about its future capabilities has been confined to the pages of science fiction. For example, Cory Doctorow’s Makers imagines a world where 3D printers are used to run off everything from amusement park rides to shelters for the homeless. Charles Stross’ Rule 34 (an allusion to an Internet maxim which states “if it exists, there is porn of it”) paints a more ominous picture, wherein online spam becomes corporeal. In one scene, an unsuspecting netizen comes home to find a computer virus has caused his printer to start manufacturing sex toys.

However, recent advances in technology, coupled with a corresponding drop in prices, have made 3D printers more accessible. MakerBot’s Replicator retails for $1,750 and a recent Kickstarter is hoping to produce a 3D printer that could sell for as low as $1,200.

Ubiquitous 3D printing would certainly has its upsides:Freedom from corporate manufacturers and excessive intellectual property regimes, easily customizable, and repairable and recyclable products to name a few. However, there’s a fairly obvious downside. After all, the Second Amendment-loving members of the AR15 community celebrated HaveBlue’s alleged creation as an end to state oversight on guns.

And the dark side of 3D printing isn’t just limited to the potential for the unchecked manufacturing of firearms. A team of scientists in the U.K. has reportedly used a similar device to synthesize chemical compounds. “We’re extrapolating from that to say that in the future you could buy common chemicals, slot them into something that 3D prints, just press a button to mix the ingredients and filter them through the architecture and at the bottom you would get out your prescription drug,” a researcher associated with the project told the BBC.

And of course, if one can use 3D-printing to produce legal drugs, one can also use it to synthesize the illegal kind. I imagine the plot of Breaking Bad would be a lot different if everything one needed to start a meth lab was available at your local electronics store.

3D printers also open up new avenues for counterfeiting and material piracy. Always on the lookout for the next thing to copy and share, the Pirate Bay, for example, has already endorsed 3D printing plans, or what they refer to as “physibles.” Who knows, in a few years the Internet adage, “you wouldn’t download a car,” may no longer hold true.

It bears mentioning that most commercial 3D printers are still a long way from being portable gun and drug labs, and many of the people working on them are making sure it stays that way. But technology only moves in one direction, and we’ll have to confront these issues eventually. As usual, the trick will be to do so in a way that maximizes the benefit of the new and minimizes its risk.

The last thing we need is for the next Byron Sonne to spend a year in jail simply because the cops found a 3D printer in his basement.

]]>http://www.macleans.ca/society/technology/need-an-unregistered-gun-theres-an-app-for-that/feed/4TEXT: Mark Carney’s speech to the CAWhttp://www.macleans.ca/economy/economicanalysis/text-mark-carneys-speech-to-the-caw/
http://www.macleans.ca/economy/economicanalysis/text-mark-carneys-speech-to-the-caw/#commentsWed, 22 Aug 2012 16:01:38 +0000Econowatchhttp://www2.macleans.ca/?p=285359Bank of Canada governor Mark Carney was the first Canadian central banker to speak in front of the country’s auto workers today. Here’s the text of the speech he delivered…

Bank of Canada governor Mark Carney was the first Canadian central banker to speak in front of the country’s auto workers today. Here’s the text of the speech he delivered to the Canadian Auto Workers union’s annual conference in Toronto:

TORONTO – Don’t look to the loonie as the biggest problem facing Canadian exports, Bank of Canada Governor Mark Carney said Wednesday in his first-ever public address to organized labour.

The country’s top central banker is speaking in Toronto at a gathering of the Canadian Auto Workers union. It is not only Carney’s maiden public address to a labour group, but also the first time any Bank of Canada governor has made such an overture.

Carney addressed a persistent complaint of those who put the blame for weak exports squarely on the shoulders of the strong Canadian dollar. The manufacturing sector and auto industry have been particularly hard hit in recent years.

He noted Canada’s export performance was the second-worst in the G20 over the last decade, with only nine per cent of exports going to fast-growing emerging markets such as China and India.

But he sought to dispel the notion that the high loonie bears the bulk of the blame.

“Some blame this on the persistent strength of the Canadian dollar,” Carney said in prepared remarks ahead of his address.

“While there is some truth to that, it is not the most important reason. Over the past decade, our poor export performance has been explained two-thirds by market structure and one-third by competitiveness. Of the latter about two-thirds is the currency while the rest is labour costs and productivity.

The Bank of Canada has kept interest rates at record lows for some time now, which has helped buttress the Canadian dollar.

But the strong currency only partially explains Canada’s weak exports, Carney said. Depending too much on exports to the United States was more of a factor, he added.

“In short, our underperformance prior to the crisis was more a reflection of who we traded with than how effectively we did it,” Carney said.

“We are overexposed to the United States and underexposed to faster-growing emerging markets.”

His remarks also touched on a familiar CAW theme: namely, that companies must keep investing in their workforces if they want to succeed.

Carney urged companies and their workers to upgrade their skills so they can compete in the global marketplace.

“We all need to recognize that the durable, high-paying manufacturing jobs of the future will be located in companies that invest to equip and train their workers and that are fully engaged in the global economy,” he said.

The demand for unskilled workers in advanced economies such as Canada is waning, he said, adding the need for skilled workers is growing.

Carney noted the number of manufacturing jobs has steadily dropped over the last 30 years. He said the use of robotics on assembly lines played a part in that decline, but he added many manufacturing jobs are migrating to low-paying, emerging markets

Federal Opposition Leader Thomas Mulcair says he doesn’t regret bringing up the issue of whether Canada suffers from “Dutch disease.” He might be the only one. The newspapers have been so full of this phrase for the last few weeks that the very sight of it must make most of us want to grab and assault the first person we can find named Van Der Whatever.

It would be some comfort if the Dutch disease debate had been handled impeccably in the press, but it hasn’t been. Dutch disease is a theoretical phenomenon in economics that occurs when high prices for raw resources attract capital and labour away from advanced manufacturing, rebalancing an economy in a hard-to-reverse, welfare-diminishing way. If the resource boom is strong enough to jolt the currency upward, that’s a double whammy for the manufacturers, to the degree they are dependent upon exports.

But a resource boom only becomes a “disease” if the economy doesn’t react with equal efficiency when the resource runs out or the price declines, because the manufacturing sector has shrunk and its markets can’t be recaptured easily. The concern is that there are beneficial “spillover” effects of having advanced manufacturing that are more easily lost than recouped; if a country loses a computer-chip factory, for example, it might not be able to open it again later, because the closure discouraged young people from getting the kind of engineering education you need to make and market chips.

It’s important to realize that the Dutch disease story has three components, all of which must be present for the diagnosis: (1) a shift from a “lagging sector” to a “booming sector” that (2) is redoubled by a strong currency and (3) creates some long-term harm because the lagging sector cannot rebound readily. That third condition is the actual “disease” part. But even economists explicitly discussing Dutch disease don’t always get around to tackling part 3, and certainly Tom Mulcair and his defenders haven’t.

Last week, for example, when everybody ran gotcha headlines along the lines of “Harper government funded study on ‘Dutch disease,’ ” it was pretty clear that the study hadn’t been read carefully. The paper co-authored by Canadian economist Serge Coulombe is called, “Does the Canadian economy suffer from Dutch disease?” But its actual focus is only on the second part of the diagnosis: to what degree is the strong Canadian dollar encouraging a shift away from manufacturing?

Coulombe et al.’s finding was that even if you just focus on the exchange-rate effects—in other words, if you leave aside the huge globalization impacts that are hurting manufacturing most in the Western democracies—only about half the effect is attributable to the Canadian dollar as such. The rest results from the relative recent feebleness of the U.S. dollar, which is out of the hands of Canadian policy-makers.

The paper thus urges skepticism about Dutch disease in Canada. It also found that the harms inflicted on manufacturing by the strong Canadian dollar weren’t particular to advanced manufacturing. Textile mills were the hardest-hit sector of all. Producers of machinery and computers were affected by the strong loonie, but so were the plastics, rubber and paper businesses. A second study, published by the Institute for Research on Public Policy on May 16, arrives at similar conclusions.

One must sense, hearing of this finding, that talk of Canada’s oil and gas industry creating a Dutch disease is a combination of semantics and ignorance. On paper, Alberta synthetic crude is defined as “resource extraction.” A paper mill isn’t. In reality, jobs and capital flowing from paper mills to Syncrude is excellent news, if a sophisticated knowledge economy is what we want. The fast-growing parts of the oil patch—steam-assisted gravity drainage in the tar sands, hydraulic fracking in the Bakken formation—are creating nuclei of engineering know-how and demand for everything from chemists to environmental scientists.

If textile makers can’t keep up, that’s not Dutch disease; textile jobs aren’t jobs we want to protect for “spillover” reasons. But Mulcair wants us to imagine ultra-skilled workers from Ontario abandoning their accumulated knowledge and their humanity as they shuffle off to Alberta to lug pipe like brutalized automata. The accusation of regional prejudice is inescapable. (Moreover, poor Alberta continually pours billions into the federal equalization program, with added costs in inhibited labour mobility, so that other provinces get a break when times are good out west. Does this cash not cushion the effects of regional booms enough? What is Alberta paying for if not goodwill?)

Meanwhile, Mulcair’s references to Dutch disease obscure his environmental criticisms of the oil patch, which have no logical connection to currency issues or industrial strategy. On May 18 he told a scrum, “We’ll just keep coming back with what the real issue is. The real issue is polluter-pay.” If that’s the real issue, why not stick to it?

]]>http://www.macleans.ca/general/so-much-for-dutch-disease/feed/44The Dutch, oil and Thomas Mulcairhttp://www.macleans.ca/politics/ottawa/the-dutch-oil-and-thomas-mulcair/
http://www.macleans.ca/politics/ottawa/the-dutch-oil-and-thomas-mulcair/#commentsWed, 09 May 2012 13:30:48 +0000Aaron Wherryhttp://www2.macleans.ca/?p=257563Stephen Gordon considers the question of Dutch Disease.
The appreciating Canadian dollar has little to do with the decline in manufacturing; employment has been declining worldwide for decades. Changes in …

The appreciating Canadian dollar has little to do with the decline in manufacturing; employment has been declining worldwide for decades. Changes in relative prices are more important. Producer prices for manufactured goods have increased by about 15 per cent since 2002, while the Bank of Canada’s commodity price index has more than doubled. Any attempt to promote manufacturing exports by depreciating the dollar is doomed to fail, since a lower Canadian dollar will also benefit resource exporters. Capital and labour will always move from sectors where prices are soft to sectors where demand is strong, regardless of what the exchange rate is doing.

The NDP leader was asked after QP yesterday about his comments on the oil industry and the reaction of Saskatchewan Premier Brad Wall.

Reporter: Brad Wall has taken exception to your comments on the weekend, saying that they’re divisive to claim that the energy sector is the problem in Canada. How do you respond to Mr. Wall?

Mulcair: Well, you’d have to find anywhere where I’ve ever said that. What I have been saying for months and indeed years is that you have to take the sustainable development approach and it has to apply to all sectors. This is not just a question of the oil sands. This is as equally applicable with regard to the export of raw logs. We have this sad tendency in Canada not to add the value here so we export the bitumen in its rawest form to the Texas Gulf Coast at WTI, West Texas Intermediate prices while the East Coast is buying at brent crude prices, quite a bit higher, paying a premium for all their gas and all their other products, instead of shipping some of that east where we could have the jobs in Canada. Just Keystone XL, to name one of the pipelines, would export 40,000 upgrading and refining jobs to the United States. That’s the tragedy of the choices that the Conservatives are making, all the while subsidizing that industry. So it has had an effect of hollowing out the manufacturing sector. It’s demonstrable. It’s measurable. And it’s been proven.

The Conservatives can send out different people to say different things. Our argument is with this Conservative government in that House with the priorities that they have. Continuing to subsidize the oil companies that are operating in the oil sands right now makes no economic sense. We have to make sure that they assume the costs in this generation. We’re living on the backs of future generations, a massive ecological, economic and social debt—the largest in our history. Indeed, we will become the first generation in Canadian history to leave less to the next generation than what we ourselves received. To me, that’s just unacceptable…

I think that if anybody reads what I’m saying it applies to all regions and all aspects of the economy. The basic rules of sustainable development—internalization of costs over the life cycle of a product, polluter pay, user pay—applies as much in the case of raw logs being shipped out from one province or the way we’re exploiting the oil sands in another. It’s not specific to one region of the country so there’s nothing divisive about it. It’s a vision that opposes that of the Conservatives which is hell-bent-for-leather to develop as quickly as we can, irrespective of the environmental degradation and the cleanup that we’re going to leave to future generations. They’re going to be stuck with the bill for the cleanup of the air, the soil and the water that we’re fouling now. Look at the price tag in today’s report to get an idea of the price tag we’re leaving to future generations. You’ll understand why this cuts across provincial and sectoral boundaries. This is not specific to one province or to one area of activity. That’s what they would like to make the debate about. But the debate is actually about sustainable development, one vision for the country, that of the Conservatives which is take whatever you can right now, let tomorrow take care of itself. Our vision which is let’s leave something to future generations, we want to put in place a system of green renewable energy across the country, that’s our type of vision instead of continuing to exploit the way we’re doing it now. Those two visions will continue to be confronted and I’ll take them on one step at a time.

]]>http://www.macleans.ca/politics/ottawa/the-dutch-oil-and-thomas-mulcair/feed/4Are we infected?http://www.macleans.ca/politics/ottawa/are-we-infected/
http://www.macleans.ca/politics/ottawa/are-we-infected/#commentsMon, 07 May 2012 13:00:14 +0000Aaron Wherryhttp://www2.macleans.ca/?p=257231Thomas Mulcair worries that we’re suffering from Dutch Disease.
NDP leader Thomas Mulcair said Saturday that, because of the way it raises the value of the Canadian dollar, other parts …

NDP leader Thomas Mulcair said Saturday that, because of the way it raises the value of the Canadian dollar, other parts of the country are paying a price for the prosperity enjoyed by natural resource sectors such as the oil sands in Alberta. “It’s by definition the ‘Dutch disease,’ ” Mulcair said Saturday on the CBC Radio show, The House.

The “Dutch disease” is a reference to what happened to the Netherlands economy in the 1960s after vast deposits of natural gas were discovered in the nearby North Sea. The resulting rise in its currency was thought to have caused the collapse of the Dutch manufacturing sector, and Mulcair said the same thing is happening in Canada. “The Canadian dollar’s being held artificially high, which is fine if you’re going to Walt Disney World, (but) not so good if you want to sell your manufactured product because the American clients, most of the time, can no longer afford to buy it.”

Dalton McGuinty has expressed similar concerns. The OECD has also raised the issue. Jack Mintz says Dutch Disease isn’t happening here. Stephen Gordon questions the concept. The Current considered the diagnosis in March. More research here and here.

]]>http://www.macleans.ca/politics/ottawa/are-we-infected/feed/8State of the anti-unionhttp://www.macleans.ca/economy/business/state-of-the-anti-union/
http://www.macleans.ca/economy/business/state-of-the-anti-union/#commentsThu, 05 Apr 2012 16:02:01 +0000Tamsin McMahonhttp://www2.macleans.ca/?p=248855Automakers are flooding to the Deep South for cheap, union-free labour

When German executives from Volkswagen descended on Chattanooga, Tenn., last May for the grand opening of their $1-billion plant, they pointed to the warm Southern hospitality and the cultural amenities of life on the banks of the Tennessee River as key reasons for deciding to build their first North American auto assembly shop in 20 years on the site of a former wartime-era munitions factory in the Deep South.

Auto industry analysts pointed to other reasons the automaker chose Chattanooga: the region’s high unemployment and strong anti-union sentiment, which promised both a massive labour pool willing to work for cheap and more than half a billion dollars in government incentives—nearly $200,000 per worker. Luring Volkswagen, which promised to hire nearly 2,000 workers for as little as $14.50 an hour, was deemed a huge coup for the city of 170,000. Since the plant opened, the city’s unemployment rate has dropped from nine per cent to 7.3 per cent. Volkswagen-branded shirts became the city’s most coveted fashion item.

Volkswagen is merely the latest foreign automaker to target the southern U.S. for expansion into the North American market. It’s a trend that is profoundly reshaping the American manufacturing landscape, pushing the country’s auto belt south from Michigan and Ohio into the cotton fields and cow pastures of Alabama and Mississippi in search of cheaper labour and fewer costly union battles. It’s not the first time the industry has seen a shift to the South, as automakers decamped for places like Kentucky, Tennessee and Missouri in the 1980s in search of cheap labour. But the present-day move appears both more profound and more lasting. For every job created by foreign automakers, mostly in the South, the Detroit Three have shed six jobs, nearly half in Michigan, according to the Center for Automotive Research. It’s a push that now threatens the future of high-paying manufacturing jobs in Canada, and maybe even the future of unionized workplaces.

The bankruptcies of General Motors and Chrysler and the rise of foreign automakers, almost exclusively heading to the southern states, have forced a steady stream of concessions from the United Auto Workers union, including multi-year pay freezes, major changes to benefits and pensions and so-called two-tier wages, where new hires at the Detroit Three make roughly half the hourly wages of their coworkers and, in some cases, less than their southern counterparts. Contracts with Ford, GM and Chrysler now start as low as $14.78 an hour. Some predict U.S. auto wages could fall even further.

“If Chrysler is receiving 10,000 applications for jobs at the lower-tier $14 per hour wage, that’s one indication that $14 per hour is still too high,” University of Michigan economist Mark Perry wrote in his blog. “That is, Chrysler could offer to pay less than $14 and still have an excess supply of workers.”

It’s not just manufacturing wages that have been under assault as the U.S. struggles to dig itself out of recession. Recently, legislators in Florida and Arizona debated slashing the minimum wage of restaurant servers to below $3 an hour as part of their strategy to be “open for business.”

“There is a race to the bottom that has been playing out sporadically in the United States for decades,” says Greg LeRoy, executive director of Good Jobs First, a watchdog that tracks how states use financial incentives to attract companies. “The difference we see right now is because the number of major deals is depressed, the ability of companies to play states against each other, what we call job blackmail, that activity is up.”

All of that has made Canadian workers, for years the poor cousins to their U.S. counterparts, seem overpaid by comparison. The Center for Automotive Research in Michigan calculated that Detroit UAW auto workers now cost $7 an hour less than their Canadian counterparts, a discrepancy that has only been exacerbated by the strong loonie. University of Windsor business professor Tony Faria estimates that with benefits, Canadian auto workers cost as much as $12 an hour more than Americans. Data from Cerno Research, a division of Owen Media Partners and Compdata Surveys, which tracks manufacturing wages, show the average pay differential for Canadian manufacturing workers runs anywhere from $2.80 an hour for warehouse employees to $9.13 an hour for production equipment operators. Where Canadian manufacturing workers differ the most from their U.S. counterparts is on the top end of the pay scale. In Canada, machine operators make as much as $40 an hour, compared to just $17 in the U.S. “We’re out of whack right now,” says Faria.“We really can’t compete with Mexico. But we can and we do have to compete with hourly wage rates in the U.S.”

That discrepancy is hitting us where it hurts. Last year, automotive manufacturers invested more than $1 billion in the U.S. and virtually nothing in Canada. This February, auto production surged 57 per cent in the U.S. and just four per cent in Canada. Canada’s manufacturing trade surplus with the U.S. has gone from $66 billion in 2002 to $20 billion in 2011. Our trade deficit in manufacturing with the southern U.S. has grown from $1.8 billion in 2002 to almost $10 billion last year.

The Canadian-bred CEO of Chrysler, Sergio Marchionne, made it clear he expects the company’s Canadian workers to make the same concessions as their counterparts across the Detroit River in contract negotiations with the Canadian Auto Workers this summer. “We will not tolerate a differential in cost positions between Canada and the United States,” he told the North American International Auto Show in January. “I lived through the introduction of the Free Trade Agreement. I lived through the loonie that was worth more than the U.S. dollar. I lived through one that was worth 60 cents. We all know how we got there. We all know how we maintain competitiveness in those times.”

It’s a reality that hit home last month, when U.S.-based Caterpillar shut down its Electro-Motive factory in London, Ont., after asking its 450 workers to slash their $30-an-hour wages in half. The company later shifted production to Brazil and to Muncie, Ind., where legions of unemployed workers lined up to earn a starting wage of just $12 an hour. “For many workers in a state like Indiana, you have a reserve army of people who are willing to work for pretty low wages just to put food on the table,” says Robert Scott of the D.C.-based Economic Policy Institute. That is sending a message to unionized workers in southern Ontario: be afraid.

Since attracting Mercedes-Benz in 1997, Alabama has built one of the largest automotive industries in the country out of virtually nothing. The state is now home to both Honda and Hyundai. When Toyota was looking to build its first V8 engine plant outside of Japan, it chose Alabama for the $200-million factory.

The state has added roughly 15,000 automotive assembly jobs since 2000; now Alabama is poised to become the country’s third-largest auto producer.

And there remains a seemingly inexhaustible supply of workers. Last July, the employment agency tasked with finding 500 temporary Mercedes workers to build SUVs for $14.50 an hour—a job requiring at least two years’ manufacturing experience—had nearly 4,000 applicants before it had even opened the doors of its Tuscaloosa office.

Southeastern states have among the lowest cost of living and the lowest energy costs in the U.S., making it comparatively easy to work for what amounts to a few dollars above Ontario’s $10.25 minimum wage. (The average home in Alabama sells for just $133,000, compared to $372,000 across Canada.)

But beneath the lure of cheap labour is another issue that has helped push America’s manufacturing heartland to the south, one that is quickly reshaping the industrialized labour movement in the north. Just five days before Caterpillar moved its operations to Indiana, the state became the 23rd U.S. state to enact so-called right-to-work legislation, which makes it optional for employees in unionized workforces to join the union or pay dues.

In courting Volkswagen, Tennessee officials relied heavily on their state’s anti-union legislation. “We are a right-to-work state with extremely low business costs,” Chattanooga’s economic development organization wrote in a presentation to car company executives. “Our large labour pool and lower union participation add up to savings you can bank on year after year.”

Union participation has been on the front line of the war for U.S. jobs. The right-leaning National Institute for Labor Relations Research in Virginia found that in the past decade employment grew in right-to-work states even as it fell in others. The Martin Prosperity Institute found that the fastest post-recession job growth has been in cities with the lowest levels of unionization.

The UAW, whose share of auto assembly plants and their workers has fallen precipitously since the 1980s, knows just how serious an issue right-to-work legislation has become for the industry, and just how much the southern states are shaping the future of automotive manufacturing. The union has organized several drives to unionize southern plants, including passing out signature cards to 800 new employees at Volkswagen in Tennessee this month and organizing an “open house dialogue” at Mercedes-Benz in Alabama this week.

The automakers have responded by throwing perks at their employees. At Mercedes in Alabama, workers get regular profit-sharing bonuses in the thousands of dollars, as well as health benefits, a subsidized onsite daycare and the ability to lease a Mercedes car at a discount. Few workers seem interested in joining a union, says Steven Allen, who worked inside the plant for years for a supplier. “They were proud to work there. They’re told when they’re hired that they’re the best, and if people don’t work there it’s because ‘they’re not good enough and you are.’”

Right-to-work legislation, which has existed since the Second World War, has quickly become one of the most hotly debated topics in state legislatures as they look to coax companies across their borders. Missouri, which is suffering its own downturn in manufacturing employment, is in the midst of a debate over right-to-work laws. And even lawmakers in Michigan—the embattled heartland of the American labour movement—have been pushing for such laws, with polls showing as many as 60 per cent of voters supporting them.

The public debate over the future of unions tends to come and go in tandem with recessions, according to Mark Sweeney of McCallum Sweeney Consulting, a South Carolina site selector that helps manufacturers in both Canada and the U.S. decide where to set up operations. But Sweeney thinks the tide of U.S. public opinion may have permanently turning against organized labour. “The pendulum swings depending on the economy, if unemployment is high or if there is full employment,” he says. “But I suspect this is a bit more than a pendulum swing. It might be a reconsideration of the whole concept of labour management compared to what it was 100 years ago.”

Not surprisingly, Sweeney says, almost all his manufacturing clients prefer to run non-unionized workplaces, with about half insisting that they won’t even consider areas that don’t have right-to-work laws. There are always other considerations for companies looking to set up across the border in Canada, but companies are avoiding locations in Ontario in favour of right-to-work states, Sweeney says. “If we’re starting out early and somebody says we’re looking in the eastern half of the U.S. and Canada for manufacturing and we’re interested in a non-union environment, [Ontario] could be subject to that same kind of early decision-making,” he says. “It’s a really touchy situation for policymakers and it’s not an easy situation. But just because it’s not easy doesn’t mean that it isn’t the way these decisions are being made.”

Ontario and Alberta both flirted with the idea of doing away with mandatory union dues in the 1990s. Saskatchewan Premier Brad Wall mused about making dues voluntary during last year’s provincial election. But there has not been a serious political push to introduce American-style right-to-work laws in Canada. Still, the country’s largest private sector union is watching the issue closely as it heads into contract negotiations. “America is the only country in the industrialized world where someone in a high-skilled, high-value, heavy industry will work for a poverty-level wage,” says Canadian Auto Workers economist Jim Stanford. “Does our government actually think it’s a good idea that high-skilled manufacturing workers should be paid $12 an hour? If they think so, then just stand back and let this continue to happen.” Like it or not, they may have no choice.

Though it’s better known for its caviar service in first class and its swank lounges at Frankfurt International Airport, much of the excitement at Lufthansa last year took place at its comparatively drab cargo operations. The carrier’s hulking MD-11 freighters hauled 18 per cent more tonnes of time-sensitive goods—ranging from German-made luxury car parts to pricey chemicals—in 2011 than the year before, when a previous record was set. Even more impressive is the destination for many of those planes: “China remains the core market for air-freight transportation out of Germany with growth at 26 per cent,” says Florian Pfaff, a manager for Lufthansa Cargo.

Apparently, not everyone is losing jobs to Guangdong province.

Despite the deepening eurozone crisis, Germany is booming. While Ottawa might like to brag about its performance through the Great Recession, the real miracle story belongs to Germany, and its manufacturing and export-driven economy. The country of 82 million has enjoyed GDP growth of three per cent or better for the past two years, while exports topped $1.3 trillion for the first time ever in 2011. Unemployment, meanwhile, is sitting at a 20-year low of 6.7 per cent, compared to Canada’s 7.6 per cent. And although it experienced a run on its banks in 2008, Germany has no housing bubble, boasts a high personal savings rate and slays deficits with near-religious zeal.

Its performance is even more impressive next to its neighbours. Spain’s unemployment rate is 23 per cent, Ireland and Portugal have both been the recipients of emergency loans, and the Bank of England is still valiantly trying to prime the pump of the British economy. Nowhere are things worse, of course, than debt-addled Greece. Teetering on the brink of bankruptcy, politicians in Athens finally struck a deal this week to implement a fresh round of budget cuts—at Berlin’s insistence—in exchange for a new, European-led $170-billion bailout. But not before an estimated 80,000 protesters took to the streets of Athens, throwing rocks and torching storefronts. A Greek newspaper even ran a picture of German Chancellor Angela Merkel in full Nazi regalia on its front page.

The attacks on Merkel are over the top, but there is little doubt who is calling the shots on the Continent these days. No longer the “sick man of Europe,” Germany has emerged as the eurozone’s de facto leader and, if appearances are to be believed, unwilling saviour. Indeed, Merkel knows full well that German voters are furious at the thought of having to pay for the profligacy of their neighbours—hence the demands for “austerity.”

While Germany says Europe could handle a Greek bankruptcy better than a few years ago, many are still hoping Merkel won’t let it come to that. A Greek default threatens to not only plunge all of Europe into a crisis, but could spark a global downturn. “I think at the moment, we are really at a crossroads,” says Alexander Herzog-Stein, an economist and labour market expert for the Hans Böckler Foundation in Düsseldorf. “And that’s something you have to tell the German people—that the strong countries have to help the others.” Otherwise, he says, Germany risks cratering its own export markets.

Europe—indeed the world—needs Germany now more than ever. The question is whether Germany will decide it needs Europe too.

As little as a decade ago, Germany was still an economic mess. After the fall of the Berlin Wall in 1989, four million Germans lost their jobs as about 14,000 companies in the former East Germany were shut down or privatized as part of the reunification process. It wasn’t until 2003 that the tide began to turn following the implementation of labour market reforms under former chancellor Gerhard Schröder. They included the creation of millions of temporary and part-time “mini-jobs” that paid up to about $640 a month (there is no minimum wage in Germany), while exempting workers from paying taxes and social security.

The effect of the reforms, recommended by a committee headed by Volkswagen’s former personnel director, can still be felt today. Germany, contrary to its image as a wealthy, union-friendly nation, now boasts one of the biggest low-wage sectors in Europe, encompassing one-fifth of the workforce. Nowhere has this wage restraint been more important than in manufacturing, where average pay increased just 22 per cent between 2000 and 2010, compared to 36 per cent for the EU. Even so, Germany’s GDP grew at an anemic 0.8 per cent in 2005, while other European countries rode the global finance wave to riches.

Then the credit crisis hit. Suddenly, Germany’s stodgy manufacturing sector became a key competitive advantage. After bailing out its banks, Berlin implemented a program that effectively paid private companies that agreed to slash employees’ working hours. That prevented mass layoffs at factories and helped support domestic consumption. Unemployment barely budged. More importantly, when demand for German-made products returned suddenly in 2009 amid a global recovery, companies ranging from Siemens to chemical giant BASF had an army of skilled workers who could be brought back quickly, giving them a jump on their foreign rivals.

The nature of Germany’s exports (which account for nearly one-third of GDP) also gave it an edge during the recovery. Unlike the U.S. and Canada, Germany doesn’t have much in the way of raw materials or resources. And its labour costs, although low by European standards, can’t compete with China’s cheap, unskilled workers. Instead, Berlin decided long ago to draw on the country’s rich history of engineering expertise by encouraging the production of expensive, high-end products. Luxury cars. Pharmaceuticals. Precision factory machinery. Americans who lost their jobs and their houses will remember all too well the outrage over Wall Street executives at bailed-out investment banks taking home big bonus cheques. Turns out, they were spending them on pricey Sennheiser headphones and BMW coupes. The hard times were not shared by everyone equally and Germany cashed in more than most.

Ironically, that continues to be the case even as Europe sinks further into a hole. Thanks to a depressed euro, Germany’s competitive manufacturers have become even more profitable since they sell as much as 40 per cent of their products in foreign currencies. Sales for the Stuttgart-based Porsche were up five per cent in January, while Daimler recorded best-ever sales of Mercedes vehicles last year. And it’s not just big corporations reaping the rewards. So does Germany’s famed “Mittelstand,” the three million or so small- and medium-sized companies that work closely with universities and produce a dizzying array of unremarkable but profitable tools and machines for export. For example, a small family-owned firm in Nienhagen, near Hanover, made the precision tool that was used to keep drilling equipment perfectly vertical during the rescue of 33 Chilean miners two years ago.

At the same time, Berlin now enjoys an embarrassment of riches when it comes to borrowing money. While Italy, Spain and others are faced with punitive interest rates, nervous European investors are pouring their cash into Germany. Some are so desperate to find a safe haven that they’re effectively paying the German government for the privilege of lending it money. Last month, an auction of six-month government bills came with a negative interest rate. “That has never happened before,” a perplexed-sounding spokesman for Germany’s federal finance agency told Der Spiegel.

It all might seem like a perverse joke to the eurozone’s struggling and unflatteringly named PIIGS (Portugal, Ireland, Italy, Greece and Spain)—particularly as Germany, through EU finance bodies, tries to impose on them its brand of fiscal responsibility, which was shaped in part by memories of its painful bout with hyperinflation following the First World War (when one U.S. dollar was worth one trillion German marks).

In the case of Greece, though, the process of arriving at a workable rescue plan that satisfied Germany was akin to pounding the proverbial square peg into a round hole. With billions’ worth of bond payments coming due in late March, lawmakers in Athens spent weeks hammering out a difficult and deeply unpopular deal to implement a new round of required austerity measures. They included axing one in five civil service jobs and slashing minimum wages by more than a fifth. But no sooner had the agreement been announced than the so-called “troika” of the European Union, International Monetary Fund and European Central Bank told them to go back to the drawing board. “The Greek offer is not sufficient and they have to go away to come up with a revised plan,” sniffed a spokesman for the German Finance Ministry. As Greek officials gritted their teeth and resumed negotiations, angry workers took to the streets, throwing rocks and petrol bombs at a mostly sympathetic police force. Finally, politicians emerged with a revised plan, only to be told by a skeptical Germany that a final approval wouldn’t be given until early March.

While ordinary Germans would likely view the eurozone as better off without any of the PIIGS, the risks associated with a Greek default are significant. For one thing, Germany’s banks are heavily exposed to troubled eurozone members. And if Europe goes into the tank, there won’t be as much demand for German-made escalators and kitchen appliances. There are already signs of trouble. Despite Germany’s banner year for exports in 2011, the month of December showed a worrying 4.3 per cent decline, their biggest drop in three years.

So why is Germany still insisting on such harsh austerity measures? Domestic politics plays a key role. “Germans perceive the current situation as one where they’ll have to shell out money to save [the eurozone] financially,” says Christian Breunig, an assistant professor of political science at the University of Toronto who did post-doctoral work in Cologne. “So in return, they’re trying to get as many political concessions as they can.” He adds, however, that Merkel has so far done a poor job of explaining to ordinary Germans why a bailout of Greece is probably in their long-term interest. “Germany should have come in harder and more committed early on. That would have restored confidence.”

It’s not just German voters Merkel needs to worry about. When it comes to the eurozone, she must be cautious to avoid appearing as though Germany is acting unilaterally, lest it raise old fears about German power left unchecked. It’s a difficult balance to strike. Even as she is being depicted as a Nazi in Greece, Merkel is being called on to take a leadership role by such unlikely countries as Poland. Radek Sikorski, the Polish foreign minister, said in a speech last fall: “I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity.”

Many believe Germany has an obligation to step up after years of reaping the rewards of anchoring the eurozone. As the monetary union’s biggest economy, Germany plays a key role in setting the value of the euro. That, in turn, takes away a key competitive tool—a cheaper currency—from smaller European countries seeking to develop their own manufacturing sectors. It’s essentially the strategy that Canada used vis-à-vis the U.S. for decades, and the reason why Ontario’s manufacturing base has been shrinking now that the loonie is near par.

At the same time, as a big European exporter, Germany carries a huge trade surplus—about $184.9 billion in 2009—while countries like Portugal and Spain have negative balances. It’s not an equitable relationship. “Germany is also responsible for the problems in Europe because we were so focused on an export-oriented strategy, becoming more competitive and relying completely on foreign demand to push our economy,” says Herzog-Stein. “So now it’s very crucial that Germany turn around and not only provide enough domestic demand so that the German economy can grow, but that it also helps other countries profit. I think that’s the responsibility of the largest country, and of those who can afford the burden. And we can afford it.”

With per capita GDP well under a thousand dollars and a government dependent on foreign aid, Cambodia is among the poorest of the poor in Southeast Asia. But with workers in China, Thailand and Vietnam, demanding and obtaining heftier paychecks, Cambodians are getting a residual lift. Rising wages, labour unrest, as well as currency instability and political turmoil in some cases, elsewhere in the region’s traditional manufacturing centers are improving the prospects of Cambodia, an industrial minnow.

The country’s garment exports have soared in the past year, increasing by nearly 40 per cent, according to the government. Independent observers might put the figure lower, but they would agree with Ken Loo, the secretary general of the Garment Manufacturers Association of Cambodia, when he points to rising wages and work stoppages in China as one of the main causes of Cambodia’s increased share of the market. It’s an important boost in a sector that has been Cambodia’s main engine of growth since the late 1990s, when the country stabilized after years of debilitating civil strife. The garment and footwear industry employs some 400,000 people in this country of just over 14 million (the Gap, H&M and Nike are among the major brands that have suppliers in Cambodia) and account for more than two-thirds of Cambodia’s exports.

But the spillover effects of higher labour costs in China and elsewhere aren’t limited to the textiles sector. Slowly but surely, Cambodia’s industrial horizons are expanding as well, with Japanese companies leading the charge. Minebea, a Tokyo-based producer of micro motors, for example, started operations in Cambodia at the end of last year. The Japanese company began outsourcing manufacturing to Thailand 25 years ago, where it has grown to employ over 30,000 workers. Because of rising wages there, it’s now assembling some of its products in a special economic zone in Phnom Penh, Cambodia’s capital. Other manufacturers—making headphones and wetsuits, among other products—have opened plants there too, lifting the sophistication of the Cambodian manufacturing sector above T-shirts and sneakers.

“It’s unrealistic to say Cambodia is adding huge value-added chains,” said Peter Brimble, chief economist of the Asian Development Bank in Cambodia. But growing hurdles in Asia’s main production centers are “enough to tip the scales” to attract investor interest in Cambodia. Gordon Peters, an investment adviser with Emerging Markets Consulting, which operates in Southeast Asia, said the number of international companies contacting his consulting firm about business scoping opportunities in Cambodia has grown exponentially this year. More investors are looking at Cambodia as an attractive “long-term bet,” one with limited dividends now but high-growth prospects in the near future, he said.

Observers often criticize the heavy-handed influence of Beijing on Cambodia. But if rising wages in the regional powerhouse can lift business and employment prospects in Cambodia, this is a spell under China’s shadow that the Southeast Asian country is likely to enjoy.

]]>http://www.macleans.ca/economy/economicanalysis/cambodia-enjoying-chinas-long-shadow/feed/0The dark side of Steve Jobshttp://www.macleans.ca/culture/the-dark-side-of-steve-jobs/
http://www.macleans.ca/culture/the-dark-side-of-steve-jobs/#commentsFri, 14 Oct 2011 14:28:26 +0000Claire Wardhttp://www2.macleans.ca/?p=220109An off-broadway show in New York looks at what it takes to make all those iPods

In what seems like an endless stream of Steve Jobs tributes and devotions, one voice stands out as a reality check. Mike Daisey, New York-based author and monologuist, is hoping to cut through the nostalgia and remind people of the nastier side of Jobs’ legacy.

“I’m almost tired of hearing what a genius he is,” says the 37-year-old creator and performer of The Agony and Ecstasy of Steve Jobs, a one-man show about the life and work of the former Apple CEO that opened off-broadway at the Public Theater in New York City on Tuesday. “I think he’d be disgusted by this level of nostalgia. He was a very unrelenting, unwavering person—focus was really the centre of his skill set, his genius.”

Daisey’s show touches on everything from Jobs’s mastery of industrial design to the objectionable practices of iPhone and iPad manufacturing plants in China. The monologue tells the story of Jobs’s obsessions and his impact on humanity—from Silicon Valley to Shenzhen. Daisey’s style is semi-improvised, or what he calls “extemporaneous monologing”—which means the show differs from night to night, often depending on the mood of the room. “The work happens in the room so it’s hard to say what is going to change,” says Daisey. “At the same time, the fundamentals of the story aren’t affected by his death. In fact, they’ll be amplified. The end of an era, the loss of individual personal power in the face of corporatism.”

Daisey’s first performance of TheAgony and Ecstasy met critical acclaim following its debut in Berkeley over one year ago. Steve Wozniak, Apple’s co-founder, told the New York Times, “I will never be the same after seeing that show.” The Washington Post called the show “blisteringly funny” and the New York Times has called Daisey “one of the finest solo performers of his generation.” Now, as he launches his New York run, Daisey’s catching some unexpected publicity following Jobs’s death. While he acknowledges the mood of his audience may be “charged,” he says he didn’t think twice about keeping the show going.

“A lot of my work in this particular monologue is breaking down people’s defenses so we can actually talk about the truth of China, of manufacturing. The stuff we never ever talk about—that we go to any length not to talk about.”

Daisey—a self-confessed iPhone addict—developed the show following his own undercover investigation of Foxconn, one of Apple’s manufacturing plants in China, now famous for its high suicide rates. Two years ago, he traveled to China and managed to tour the facilities by posing as an American businessman. He discovered dreadful labour conditions and tales of human rights abuses that confirmed the worst of what he’d read in online reports.

“I have personally talked to hundreds of people whose joints in their hands have disintegrated from working on the line over and over again,” says Daisey, who also discovered workers as young as 13 at Foxconn. Many of the workers logged 16-hour shifts, and some never left the factory—sleeping in small rooms crammed with bunk beds. “I think, if there’s any justice in the world, then [Jobs’s] legacy will share in its description the fact that he was a manufacturing industrialist in this age. And that means that he made the choice to export all of his jobs to China. Sending the jobs there but none of our values, and exploiting people who live under a fascist government.”

Prior to Jobs’s death, Daisey used to hand out cards with Jobs’s email address on them at the end of his shows, encouraging audience members to email the Apple CEO with their questions and concerns. Some of them did, and Jobs—as he was known to do—occasionally responded. In some cases, he pointed them to Apple’s Supplier Responsibility Report online. To others, he wrote, “Mike doesn’t understand the complexity of the situation.” Even in defending what Daisey feels is indefensible, Jobs was just as Daisey describes him: unrelenting and unwavering.

]]>http://www.macleans.ca/culture/the-dark-side-of-steve-jobs/feed/24The future of manufacturing in Canadahttp://www.macleans.ca/economy/business/economy-up-off-the-factory-floor/
http://www.macleans.ca/economy/business/economy-up-off-the-factory-floor/#commentsWed, 21 Sep 2011 10:20:01 +0000Erica Alinihttp://www2.macleans.ca/2011/09/22/economy-up-off-the-factory-floor/Some Canadian firms are showing how the sector could drive the economy of the future

When the assembly line at Ford’s plant in St. Thomas, Ont., came to a halt on Sept. 15, it wasn’t just one factory that shut down. The closure could bring the death of an entire industrial ecosystem, experts warned. More than 300 suppliers feed into the St. Thomas plant—35 of them in Canada. Job losses are likely to extend far beyond the 1,100 workers directly employed at the southern Ontario plant that had been churning out Ford Crown Victorias, Mercury Grand Marquises and Lincoln Town Cars for the past 44 years.

The story of St. Thomas and its displaced workers follows a script well-known to this and most other rich countries. Between 2004 and 2008, Canada shed nearly 322,000 manufacturing jobs, according to Statistics Canada, and this was before the economic downturn took hold. In the U.S., the hemorrhage, driven, as elsewhere, by cheaper foreign competition and a general shift toward the service sector, amounts to eight million jobs lost since 1979. And workers transitioning to a job outside the factory often have to accept a painful pay cut—in Canada it averages around $10,000 less a year, according to a 2008 report by Toronto-Dominion Bank—driving up the divide between rich and poor. Yet the loss of industrial jobs has simply been assumed to be the price of advanced development.

There are signs, though, that the factory era may not be over in Canada just yet. Some manufacturers in niche markets are flourishing. Others are showing how the production plant, with a high-tech spin on it, could even be the future of the Canadian economy—or at least an integral part of it.

Of course it’s not going to be a return to the old-school resource mill that turns raw commodities into finished goods. Homegrown manufacturing these days is a little more complex: focused on bringing together various components from different supply chains “in a way where they work, and where all of those parts can be choreographed to arrive at a certain time, in order for you to build some sort of finished product,” says Mike Andrade, senior vice-president for diversified markets at Celestica, a provider of electronics manufacturing services headquartered in Toronto.

Celestica, which provides manufacturing and other services for Waterloo, Ont.-based Research in Motion, among other firms, is one of this newer breed of Canadian manufacturer. With industrial plants and design and engineering teams everywhere from Ottawa to Laem Chabang, Thailand, Celestica handles all aspects of production for other companies. Its plants in Asia build phones, but its Toronto facilities can prototype new products such as smartphones to ensure a smooth scale-up of production, and repair them too if they break after sale. Another of the company’s specialties is designing and overseeing supply chains its clients rely on to produce anything from guidance systems for airplanes to medical devices.

Delegating supply chain management to contract manufacturers like Celestica is a long-standing practice in the electronics industry, where competition tends to be fiercest and business models are faster-changing than in virtually every other sector. Today, though, that model has spread everywhere, from the defence industry through to automakers and the green-tech sector. Almost unnoticed by consumers, the world’s leading contract manufacturers—which besides Celestica include China’s Foxconn, the U.S.’s Sanmina-SCI and hundreds of smaller competitors—now account for a significant slice of the global manufacturing market. These companies manufacture anywhere in the world, but they often keep a chunk of the process, and control over it, close to home.

At the same time, some firms—including in the electronics sector—are dusting off their machinery and shifting much of their manufacturing back to their own plants. That’s the case, for example, at Miranda Technologies, a Montreal-based maker of infrastructure and monitoring systems for the broadcast industry. After contracting out the manufacturing process between 2001 and 2007 in order to meet rapidly growing demand, the company decided to turn the switch of its own assembly lines back on in 2008. “It turned out that outsourcing wasn’t giving us a great advantage,” says chief operating officer Luc St-Georges. So Miranda opted for doubling its manufacturing shop from 30,000 to 60,000 sq. feet, and went on to assemble almost everything in-house.

Offshoring isn’t for everyone, says Brian Piccioni, an analyst at Bank of Montreal. Generally, it benefits the bottom line of companies that are in the business of fabricating millions of identical units. Apple, for instance, isn’t about to shift the production of iPods from Asia to California. But that was not the case with Miranda, whose product list encompasses over 900 different hardware devices, but whose yearly sales hover around 160,000 units. For this kind of high-mix, low-volume business, says Piccioni, Canada is a good place to run a factory.

And whatever manufacturing will come to look like, keeping that capability alive is essential, argues Celestica’s Andrade. Without it, he told Maclean’s, “you’re not able to turn ideas into products, and you’re not able to make sure that the products that you have keep working.” Expanding that capability, he maintains, may be just what Canada needs to translate generous public funding of research and development into homegrown multi-million-dollar global corporations, and not just start-ups that are regularly swallowed up by foreign multinationals.

Making some things at home and helping to design and prototype devices also ensures the country continues to have a good understanding of the technology its citizens have come to rely on, which ultimately is, Andrade insists, in our best interest.

Without that understanding, “you’re relying upon the goodwill of someone that you’ve never met and who may or may not ultimately have the same point of view as you do, and you’re relying on them now for something you’ve based your standard of living on. It’s a heck of a bargain to make.”

There’s more than circuit boards to the future of “made in Canada,” too. Though some of the modest growth in manufacturing that’s helped propel Canada’s post-recession rebound may be short-lived, in some sectors there’s potential for long-term expansion, says Michael Burt, an associate director in the industrial economic trends group at the Conference Board of Canada. Take aerospace, he says, where governments in Asia and the Middle East are turning to the likes of aircraft maker Bombardier to build up their transportation infrastructure.

Canada has also quietly become a world leader in a sector few associate with factories and conveyor belts: food manufacturing. With a rich agricultural endowment and a strong domestic demand, food processing grew right through the economic downturn to eclipse even the auto industry as Canada’s largest employer in manufacturing, says Burt. There are now around 230,000 Canadians whose job is, for example, to turn grains into packaged whole grain bread. And while global markets are rife with agricultural trade barriers, in a world where China and India are net food importers, there are plenty of opportunities for growth abroad, adds Burt.

Even sectors once deemed extinct in the age of globalization are proving there’s room for a made-in-Canada option. Dayton Boots, the Vancouver, B.C.-based maker of leather footwear for loggers, motorcyclists and construction workers, continues to make all of its goods at one manufacturing plant in East Vancouver. The company went into receivership in 2004, before its current CEO Stephen Encarnacao took over in 2005 and turned it around by playing up precisely the manufacturer’s Canadianness. One of the survivors in the Canadian textile and apparel industry, whose overall production has shrunk by 60 per cent in the last decade, the company calls itself “stubbornly Canadian.” The marketing strategy works particularly well with today’s quality-conscious consumers, says Encarnacao. A focus on quality and durability has kept others afloat in the textile industry, such as manufacturers of seat belts and firefighter uniforms, says Burt. After years of shrinkage due to competition from abroad, there are signs that things have stabilized. In 2010, the textile sector saw its first year of growth in more than a decade.

Some experts suggest there may be signs here of a broader change in the global supply system. Research tied to an upcoming survey of domestic manufacturers by accounting and advisory firm KPMG found that Canadian companies are planning to source more of their product components from home and the U.S. in the next couple of years. It’s a U-turn from last year, when most said they would buy more from China. Logistical headaches are leading managers around the world to revise global supply chains looking for ways to save, says Jonathan Kallner, KPMG’s national industry leader, industrial markets. It’s not just because higher oil prices are bumping up transportation costs and eroding the price advantage of sourcing components in faraway, low-cost jurisdictions. Another problem, notes Kallner, is that there are few trains and cargo planes left linking parts suppliers to the companies that own the end products. In part, explains Kallner, it’s because “we see significant amounts of natural resources being moved out of North America into developing countries, and so a good amount of our capacity is being used to move those resources.”

The rebirth of manufacturing is not without big challenges. It’s not clear, for instance, whether the factory of the future is going to be the reliable supplier of steady, middle-salaried jobs it used to be. Some in the U.S., like Susan Hockfield, the president of the Massachusetts Institute of Technology, believe that assembly lines can still provide work for millions. Several scholars at MIT are calling for industrial policies to spur the birth of new manufacturing industries around advanced technologies such as lithium batteries and biotech. But others are skeptical. Columbia University economist Jagdish Bhagwati, for example, calls North America’s recent fascination with manufacturing a “fetish.” High-tech manufacturing, he argues, will create few and relatively high-skilled jobs—just like the service sector. Small-scale cottage industries appealing to niche markets also have little room to become sources of jobs for the masses.

Some question whether Canada really shares America’s new-found enthusiasm for the factory. Canadians appeared exceedingly comfortable with the demise, only two years ago, of the nation’s telecommunications behemoth, Nortel, says Celestica’s Andrade. When the company filed for bankruptcy protection in 2009, there was hardly any talk of a government bailout. “I would challenge you to think that people even care [about the future of manufacturing in this country],” he says. In part, he speculates this lack of interest may be due to that fact that because Canada, unlike the U.S., has never been one of the world’s manufacturing powerhouses, seeing jobs and factories move to low-cost jurisdictions in the past three decades was somewhat less traumatic. Canadians may be too busy selling natural resources and patting themselves on the back for faring so well through the downturn to wonder about the fate of “made in Canada,” he says.

A second dip into recession, of course, could wipe out that attitude, and help focus minds back on the future of manufacturing.

It’s hard not to laugh when Barry Smith starts telling stories about the hapless young workers he has to deal with. Smith, who runs Toronto-area roofing company RoofSmith Canada, tells of one who didn’t come to work because his cat had fleas, and another who jumped off a shed roof, even though he’d just tossed bags of nails into the garbage bin below. But the laughing tapers off when Smith, 46, talks about skills.

“They don’t know how to handle a tool properly,” he says quietly. “They’re bright kids, but they hold a hammer at the top instead of the bottom, so it takes four swings instead of one to get a nail in. They don’t know how to read the short lines on a tape measure and they’ve never used power tools, which makes you really cautious.” He says they can’t seem to detect the patterns of the work—you rip up part of the roof, that gets thrown down, that goes into the garbage—so they just stand around. “It can get really frustrating.”

There’s much talk about a coming crisis in the trades—that we simply don’t have enough new recruits to replace an aging workforce. By some estimates, Canada could face a shortfall of up to one million skilled tradespeople by 2020. To address this shortage, the government is funding a variety of incentives to attract young talent and it’s beefing up our apprenticeship training programs—registrations are at an all-time high. But a stumbling block has emerged that’s getting harder to ignore: by all accounts, we have the least handy, most mechanically deficient generation of young people. Ever.

It’s easy to see why.

Shop classes are all but a memory in most schools—a result of liability fears, budget cuts and an obsession with academics. Still, even in vocational high schools where shop classes endure, a skills decline is evident. One auto shop teacher says he’s teaching his Grade 12 students what, 10 years ago, he taught Grade Nines. “We would take apart a transmission, now I teach what it is.” Remarkably, most of his Grade 11 students arrive not knowing which way to turn a screwdriver to tighten a screw. If he introduces a nut threaded counterclockwise, they have trouble conceptualizing the need to turn the screwdriver the opposite way. That’s because, he says, “They are texting non-stop; they don’t care about anything else. It’s like they’re possessed.”

At home, spare time is no longer spent doing things like dismantling gadgets, building model airplanes or taking apart old appliances with dad; there’s no tinkering with cars, which are so computerized now you couldn’t tinker if you wanted to. A 2009 poll showed one-third of teens spend zero time per week doing anything hands-on at all; the same as their parents. Instead, by one count, entertainment media eats up 53 hours a week for kids aged eight to 18. As for those new apprentices? They’re signing up and then they quit. Depending on the province and trade, some 40 to 75 per cent drop out before completing their program.

In Nisku, Alta., John Wright, the technical supervisor at manufacturing company Argus Machines, oversees 12 apprentices in the welding, machinist and millwright trades. Three years ago, he started noticing two tiers of applicants, those with basic mechanical skills and a new crop who, as he says, had no clue what they were doing. He speculated the disparity stemmed from their upbringing.

“The ones from the farm community weren’t afraid to get in there and get dirty. They could figure out basic repairs. And when you have to feed the chickens and milk the cows every day, you learn how to show up to work on time.” Those who didn’t have hands-on experiences couldn’t grasp basic nuts-and-bolts mechanics, they couldn’t solve simple problems. Worse, they lacked the same work ethic, which made them too difficult to train. The implications reach well beyond the trades.

Occupational therapist Stacy Kramer, clinical director at Toronto’s Hand Skills for Children, offers one explanation for what’s happening. It begins with babies who don’t get put on the ground as much, which means less crawling, less hand development. Then comes the litany of push-button toy gadgets, which don’t exercise the whole hand. That leads to difficulty developing skills that require a more intricate coordination between the hand and brain, like holding a pencil or using scissors, which kindergarten teachers complain more students can’t do. “We see 13-year-olds who can’t do up buttons or tie laces,” she says. “Parents just avoid it by buying Velcro and T-shirts.” Items that—not incidentally—chimpanzees could put on.

When the first apes climbed down from the trees to explore life on the ground some three million years ago, it was their hands, no longer used for branch swinging, that helped trigger our evolution. Hand structure changed, enabling us to perform increasingly complex grips. The conversation between hand and brain grew more complex, too. We advanced to the unique ability to visualize an idea, then create that vision with our hands. That’s meant everything from developing tools to imagining airplanes to performing open-heart surgery. So what happens if that all-important hand-brain conversation gets shortchanged at a young age? Can it be reintroduced later, or does that aptitude dissipate?

“We don’t really know,” says neurologist Dr. Frank Wilson, author of The Hand: How Its Use Shapes the Brain,Language and Human Culture. “That research wouldn’t get through an ethics committee, even though it’s happening on a massive scale in our homes every day.” We only have these uncomfortable clues, such as young people who can’t visualize how to best wield a hammer. Or teens who, despite years of unscrewing bottle tops and jars, can’t intuitively apply the righty-tighty, lefty-loosey rule of thumb.

Predictably, this is affecting other industries that depend on a mechanically inclined workforce. After NASA’s Jet Propulsion Lab noticed its new engineers couldn’t do practical problem solving the way its retirees could, it stopped hiring those who didn’t have mechanical hobbies in their youth. When MIT realized its engineering students could no longer estimate solutions to problems on their own, that they needed their computers, it began adding remedial building classes to better prepare these soon-to-be professionals for real-world jobs, like designing airplanes and bridges. Architecture schools are also adding back-to-basics courses. As for the trades? Veterans like Barry Smith have little choice but to attempt to nurse a hands-on ability among new recruits one hammer faux pas at a time, teaching the next generation of tradespeople just how to hit a nail on the head.

]]>http://www.macleans.ca/society/life/why-your-teenager-cant-use-a-hammer/feed/124Why China’s days as a rare earth bully are numberedhttp://www.macleans.ca/economy/economicanalysis/why-chinas-days-as-a-rare-earth-bully-are-numbered/
http://www.macleans.ca/economy/economicanalysis/why-chinas-days-as-a-rare-earth-bully-are-numbered/#commentsFri, 15 Jul 2011 21:22:36 +0000Erica Alinihttp://www2.macleans.ca/?p=205182Have you ever begged your six-month-old to stop throwing the pacifier off the edge of the high chair­ only to watch him do it again with a profoundly amused, puffy-cheeked…

Have you ever begged your six-month-old to stop throwing the pacifier off the edge of the high chair­ only to watch him do it again with a profoundly amused, puffy-cheeked smile? That must be how American, Japanese and European diplomats feel today. After pleading with China not to re-issue rare earth quotas, Beijing did just that, imposing new restrictions that would keep exports of the strategic materials at roughly last year’s levels.

Rare earth metals are the little-known but vitally important stuff that things like iPhone and laptop monitors, and wind turbine and hybrid car parts are made of. As Maclean’sreported last November, these metals are so crucial to much of the high-tech industry that, like oil and diamonds, they have effectively become a tool for geopolitical arm-twisting.

Mostly, they are a tool for the People’s Republic, which produces more than 90 per cent of the world’s rare earth metals. For example, when Beijing and Tokyo got into a diplomatic scuffle last year, China shut off exports of rare earth metals to Japan. Prices for the key metals skyrocketed up to 475 per cent as a result, spreading panic among Japanese manufacturers and prompting their government to comply with Chinese demands.

That’s why eggheads in Japan, Europe and North America were so disappointed with the new quotas announced today. The European Trade Commission called Beijing’s move “highly disappointing,” which, in diplomatic speak, is pretty heavy wording.

China, though, doesn’t seem too bothered by the global outpour of consternation, nor by threats to bring the whole affair before the World Trade Organization, which polices its member countries’ adherence to free trade practices.

But Beijing may soon need to change that attitude. China’s strong-arming has prompted some big manufacturers, such as Toyota, to come up with ways to avoid using the scarce materials altogether. Most importantly, two recent discoveries of vast rare earth deposits could challenge China’s monopoly on the stuff. This month, an estimated 267 million metric tons of rare earth deposits were found in Madagascar, where mining is expected to kick off in 6-8 months. And last June, Japanese scientists found between 80 and 100 billion metric tons of the metals on the floor of the Pacific Ocean.

All of which is to say that China’s days as a rare earth bully may be numbered.

]]>http://www.macleans.ca/economy/economicanalysis/why-chinas-days-as-a-rare-earth-bully-are-numbered/feed/13Importing troublehttp://www.macleans.ca/economy/business/importing-trouble/
http://www.macleans.ca/economy/business/importing-trouble/#commentsTue, 24 May 2011 15:10:50 +0000Erica Alinihttp://www2.macleans.ca/?p=192707While a falling U.S. dollar is a chief cause of inflation, China may become its real source

Economic doomsday types who predict a coming era of out-of-control inflation usually point to the sinking U.S. dollar as one of the chief culprits. (A falling dollar means it costs more to buy goods, and purchasing power falls.) But they may be worrying about the wrong problem. According to data from the Federal Reserve, the impact of a weak U.S. dollar on import prices has in fact been steadily declining from the 1980s into the early 2000s. This is in large part because China dominates the U.S. import market, and Beijing keeps the yuan fixed against the dollar. The peg erases the effects of currency fluctuations on imports from China, which is why core inflation didn’t rise much even as the dollar lost value. (The dollar’s weakness, in turn, has guaranteed low price tags for Chinese products across the globe, dampening inflationary effects worldwide.)

Now, though, that lid on prices appears to be coming off, and China may become the real source of inflation in the U.S. and elsewhere. From Jiangsu to Guangdong, the country’s most industrialized provinces are experiencing double-digit wage hikes. When auto workers in southern Guangdong went on strike last year demanding higher pay, local companies and foreign manufacturers got a taste of what’s to come as younger and more outspoken workers enter the labour market. Also, China’s labour force is shrinking. The results of the latest population census, conducted in 2010, show that China’s replacement rate is already below the average of the United States, the United Kingdom and France, and on par with countries such as Italy and Japan. Employers in China are already struggling to find new hires. Rising prices are also the product of Beijing’s attempts to stimulate domestic demand, and diversify the economy away from exports.

All this means that “we have moved from an era of easy deflationary environment to one of inflation,” development economist Jeffrey Sachs told the Wall Street Journal. From sneakers to barbecue sets, there soon may be no more cheap, made-in-China consumer goods to help the West keep inflation in check. Higher prices, then, could indeed be on the horizon for the U.S. (and the rest of the world). But that may be regardless of the dollar’s recent misfortunes.

]]>http://www.macleans.ca/economy/business/importing-trouble/feed/0China’s power playhttp://www.macleans.ca/news/world/armed-and-dangerous/
http://www.macleans.ca/news/world/armed-and-dangerous/#commentsTue, 09 Nov 2010 14:20:38 +0000Charlie Gillishttp://www2.macleans.ca/?p=156695China is flexing its trade and military muscles. What does it mean for the West?

In the world of prized metals, dysprosium lacked a certain star power. It lies deep in the so-called f-block of the periodic table—that free-floating part near the bottom you never used in high school chemistry—along with the other so-called rare-earth elements with tongue-twisting names like neodymium and lutetium. No one ever set out with mule and pick-axe to find dysprosium. It occurs only as a constituent part of other mineral compounds, which explains why its name derives from the Greek for “hard to get at.”

But in recent months, dysprosium has shed its obscurity to prove that, like oil or diamonds, it can serve as leverage in an international dispute. Its debut took place shortly after Sept. 7, when Japan seized the crew of a Chinese fishing boat that had rammed two Japanese coast guard vessels near the Senkaku Islands, a string of barren rocks jutting from the East China Sea that has been a source of tension between the two countries for centuries. Infuriated by Tokyo’s refusal to turn over the skipper of the trawler, Beijing retaliated in a way no one expected: it cut off Japan’s supply of dysprosium, along with 16 other rare earth metals. Dysprosium and its chemical cousins are the lifeblood of Japan’s vaunted high-tech industries, used in everything from iPhone screens to the electric motor of the Toyota Prius. China, it turns out, produces 93 per cent of the world’s supply of them, having gotten into the market 25 years ago, then flooded the globe with cheaply mined product during the late 1990s. Today, if you want a shipment of dysprosium, you buy it from China.

The results of its embargo were impressive, if frightening. Within days, executives with some of Japan’s biggest manufacturers were warning production could grind to a halt if the two sides didn’t resolve their differences. Tokyo quickly capitulated, freeing the Chinese trawler captain and calling a commission to identify alternative sources of rare earth elements. On Sept. 28, China turned the dysprosium tap back on.

Crisis averted—for now. But China’s power play was the latest in a string of moves that have rattled its neighbours and forced Western leaders to recalibrate assumptions about the trustworthiness of the world’s next superpower. China’s threats of trade sanctions against Norway over the awarding of the Nobel Peace Prize to imprisoned dissident Liu Xiaobo, along with its recent use of its rare earth metals monopoly to raise diplomatic pressure on the U.S., have called into question its past pledges to keep international politics separate from trade. So too has its steadfast refusal to revalue its currency upward, a move that might ease pressure on U.S. manufacturers, but more importantly engender goodwill among American lawmakers. But most troubling of all has been Beijing’s increasing aggressiveness in territorial disputes with neighbours like Vietnam—and its heated rhetoric when Washington has spoken up on their behalf. When the U.S. announced in August it would insert itself into Beijing’s talks with Southeast Asian nations, aimed at creating a dispute-resolution framework for these increasingly bitter turf battles, Chinese Foreign Minister Yang Jiechi flat out accused the Americans of “an attack on China.”

These developments would be less unnerving were they not unfolding against the backdrop of a military expansion the likes of which hasn’t been seen since the Cold War. Beijing’s annual spending on its armed forces has almost doubled since 2003 to reach $150 billion, according to the most recent estimates published in an annual Pentagon report to Congress, and its navy is now the largest in Asia, with 60 submarines and some 214 surface vessels, including 74 destroyers and frigates. Much of its arsenal is arrayed across the strait from Taiwan. Yet China’s new naval base on Hainan Island speaks to a renewed desire to control international shipping traffic on the South China Sea. Among other things, it features a James Bond-style underground port, which allows submarines to come and go undetected.

To James Holmes, a professor of strategy at the U.S. Naval War College, the implication is clear. “They’re building up sufficient military force to change thinking in Washington in times of crisis,” he says from his office in Newport, R.I. “If they can credibly threaten to thwack the U.S. Navy as it’s trying to rush units into the region, that really changes things for President Obama, or whoever’s making the decisions. Getting into a tussle in the western Pacific, and coming up on the short end, is one of the few things that could cost us our superpower status in an afternoon.”

Thwack? Tussle? Losing superpower status? Two years ago, when the Beijing Olympics were ending amid toasts to multilateralism, it seemed churlish to even raise such scenarios. China was now a full-fledged member of the World Trade Organization and a charter member of the international system; Confucius Institutes were springing up across the Western world to foster understanding of Chinese values—a sure sign the People’s Republic was mastering the art of soft power. Even long-time Sino-skeptics like Prime Minister Stephen Harper were tempering their complaints about spying, greenhouse gas emissions and human rights abuses in the belief that China was accepting its new role as a responsible player in the world order.

Those assumptions weren’t so much wrong as incomplete, says Martin Jacques, author of When China Rules the World, a 2009 book that predicts China will force sweeping change on neighbours and competing powers alike. Beijing’s recent foray into soft power, he says, was merely one layer of its long-haul strategy to spread its influence throughout Asia and, eventually, the world. The only question was when it would be forced to take off the velvet glove, says Jacques, and the turning point was the economic downturn. “It forced issues to the fore that its leaders would happily have left to the next generation,” he says. “The result, you could say, has been to foreshorten China’s rise.”

The prime example is the dispute over the yuan, which by last week was threatening to trigger an all-out global currency war. While Western leaders, led by members of the U.S. Congress, voice alarm about manufacturing jobs vanishing overseas due a cheap yuan, China’s leaders see themselves hurtling toward a floating currency much faster than they’d hoped. They note that per capita income in China still lags far behind that of other industrialized countries, and are convinced that allowing the yuan to float would forestall the country’s development by driving up the price of its exports, casting millions out of work. “A sharp appreciation of the currency would cause economic and social challenges at home,” Lan Lijun, China’s ambassador to Canada, told reporters in Ottawa last week. “You will see a gradual appreciation of the currency. But we’ll do it according to China’s conditions.”

Alas, China’s conditions may prove good for no one, not even China. While Beijing’s economic brain trust has grudgingly permitted to allow the yuan to appreciate about 20 per cent over the past five years, it has intervened to keep the currency far below its real value. As a result, other countries are devaluing to ensure their exports stay competitive with China’s, a race for the bottom that economists warn could touch off a destructive trade war. In September, lawmakers in the U.S. House of Representatives passed a law enabling the White House to take trade sanctions against China unless it softens its position.

The same brinksmanship now pervades China’s approach to its territorial disputes, in which until recently it showed a spirit of measured co-operation. Two years ago, for example, Beijing signed an agreement with Japan to jointly develop potentially rich oil and gas reserves on the Senkakus, despite their centuries-old dispute over the islands, currently held by Japan. Japan’s decision to seize the Chinese trawler put that deal at risk, but even those familiar with the Sturm und Drang of Beijing’s foreign policy were caught off guard by its direct resort to crippling trade action. “It’s indicative of a willingness to ramp up, to escalate,” says Paul Evans, director of the Institute of Asian Research at the University of British Columbia. “And the negative responses on the part of other countries to [China’s] behaviour should be sending warning signals to Beijing.”

Evans, a leading authority on security issues in the Asia Pacific, sees the rare earth metals embargo as part of a series of hardball tactics, typified by China’s actions in the Spratly and Paracel Islands in the South China Sea, where Beijing is the one playing high-seas cop. Potential oil-and-gas reserves and abundant fish had led to a tangle of claims by China, Malaysia, the Philippines, Taiwan and Vietnam on both archipelagos. But the islands’ strategic position on one of the world’s vital shipping corridors has proven too attractive for China’s leaders to wait for diplomacy to take its course. They’ve claimed both chains as their own, and by Hanoi’s count have seized some 63 Vietnamese fishing vessels around the islands in the last five years, including one they released last week after holding it for a month.

Suffice to say, both these cases have illustrated how quickly Chinese assertiveness in Asia runs up against U.S. interests. Japan’s claim over the Senkakus, for one, is buttressed by the 1960 Treaty of Mutual Co-operation and Security between Washington and Tokyo, which commits the U.S. to “act to meet the common danger” should anyone attack Japanese territories. In 2009, a State Department official reaffirmed Japan’s claim to the islands, and confirmed that they are protected under the treaty. (China’s Foreign Ministry reacted angrily: “Any attempts to cover the [islands] under the treaty is absolutely unacceptable to the Chinese people,” declared a spokesman.)

Even Vietnam, which until the mid-1990s had no diplomatic relations with Washington, has rushed into the arms of Uncle Sam after getting a taste of the new Chinese aggression. In the last four months, both Secretary of State Hillary Clinton and Defense Secretary Robert Gates have paid visits to the country that, as recently as 1996, Washington designated as a “combat zone.” It was a clear show of support for Hanoi on the Paracels and Spratlys issue. But the spectacle of such strange political bedfellows was striking: these days, both sides appear more concerned by the common threat posed by China than by the wounds of the Tet Offensive.

No one is predicting a titanic battle between the U.S. and the People’s Republic, of course. Beijing requires peaceful resolution of most conflicts in order to maintain uninterrupted trade, analysts point out. But gone are the days when the West could lecture it on the art of diplomacy, or count on fear of the U.S. to keep China in check. “The shift in the global order we are witnessing,” says Evans, “is the most significant since the Second World War.”

What, then, is driving China’s new-found audaciousness? To some degree, opportunity, says Holmes of the U.S. Naval War College. Aware that the U.S. military is spread thin by the recession, and by the war in Afghanistan, Beijing has made the most of its chance to strengthen its presence in its own backyard, Holmes theorizes. That, in turn, has breathed confidence into its interactions with neighbouring countries. Most striking to Pentagon observers has been China’s investment in land-based ballistic missiles stationed on Hainan Island, which may prove the key to regulating activity in the South China Sea.

Meanwhile, China has amassed a menacing array of ships and aircraft in support of its long-standing claim on Taiwan. Last year, a study by the Rand Corporation on the military situation in the Taiwan Strait concluded that the U.S. can no longer be confident of winning a battle for the air over the key waterway—“a dramatic change,” the report noted, “from the first five-plus decades of China-Taiwan confrontation.” Yet the U.S., with its military commitments and ballooning budget deficits, has been able to afford only token moves to answer the growth of Chinese air power.

China’s lack of aircraft carriers has led military experts in the past to discount China as a true global player. But Beijing has made strides in that department, too. Its carrier program appears to centre on the Varyag, a 65-tonne hulk decommissioned by the Soviets before it was fully built and purchased by Chinese interests in 1998 from Ukraine. Today it floats almost fully refurbished in the naval port of Dalian, and may be operational in as little as a year, according to naval intelligence reports. For training purposes, crews have built a full-scale replica of the Varyag’s 300-m deck on the roof of a naval research complex in Wuhan, about 650 km inland. It is a spectacle to rival anything China built for the 2008 Summer Games, complete with an “island” turret rising 10 storeys from the roof of the building, and helicopters and jets parked on the non-skid surface of the “deck.”

Yet more important than U.S. overextension, or the calculus of submarines and rockets, may be the new generation of Communist party members who hear opportunity knocking. Many of the young leaders now assuming influential positions believe not just in China’s economic liberalization, but in its destiny of global dominance, says Evans. “They are much closer to the People’s Liberation Army, and at least one faction is made up not of reformers and business people, but of princelings. They come out of a much more defence-minded position. They are going to take harder lines on international issues.”

These so-called princelings are part of an ongoing contest within the party to determine the country’s future course, says Wenran Jiang, an expert at the University of Alberta’s China Institute. On the other side are advocates of internal reform—a freer press, greater international co-operation—who get little attention in the foreign media. “These are the debates going on inside the Communist party,” says Jiang, pointing to an open letter published last week by a group of senior party members calling for greater media freedom. Yet even those favouring internal reform maintain a strong sense that China is foreordained to shape the world, he says.

How to respond, if at all, to that sentiment is one of the most important foreign policy questions now facing Western governments. Gordon Houlden, a former director-general for East Asia at Canada’s Department of Foreign Affairs, predicts more “collisions” of power like the ones seen in recent weeks. “That’s why the G20 is going to be important, that’s why the UN Security Council is going to be important,” says Houlden, now head of the U of A’s China Institute. “Ways have to be found to manage those conflicts.”

Unfortunately, Beijing hasn’t exactly shown enthusiasm for mechanisms to manage conflict: its hostile reaction to Washington’s attempt to set up a resolution framework for China’s disputes with ASEAN nations made that clear. And when it does play by the rules, the results can come as an unpleasant surprise to Western countries. Last week in Ottawa, a conference held to celebrate 40 years of diplomatic relations between Canada and China opened amid reports that Beijing had helped block Canada’s bid for a non-permanent seat on the UN Security Council. Lan Linjun, the Chinese ambassador, denied knowledge of how his country voted. But the “special relationship” invoked throughout the conference suddenly didn’t seem so special.

Such moments, says Houlden, are just the beginning of an era in which China will flex growing muscle in international institutions like the UN and International Monetary Fund, or demand reforms to them that will give it greater clout. “They won’t get their way every time, but they can’t be ignored.” Western countries can take solace in the knowledge that the Chinese can’t simply go it alone—their myriad trade connections and need for foreign markets make Soviet-style isolationism impossible. But for now, Beijing seems prepared, metaphorically speaking, to break a few eggs.

Consider its handling of the rare earth metals controversy. Within days, Tokyo struck its commission to identify alternative sources, while in Washington, defence contractors raised alarms, warning that the minerals are key components in America’s most advanced weaponry, from helicopter blades to the tiny magnets that guide the fins of smart bombs used in Afghanistan. Yet Beijing evidently felt no compunction. Having let Japan out of its doghouse, it began squeezing rare earth exports to the United States.

It’s the sort of thing you do if you aim to send a message to the superpower on the other side of the planet. And while old China hands like Houlden predict that Beijing will soon see the error of its recent ways, they also concede that China is past the point where Western leaders could hope to contain it. One hates to think the dysprosium embargo is a sign of things to come. But if it is, there’s probably not much the rest of the world can do.

]]>http://www.macleans.ca/news/world/armed-and-dangerous/feed/15The future, or a flop?http://www.macleans.ca/economy/business/the-future-or-a-flop/
http://www.macleans.ca/economy/business/the-future-or-a-flop/#commentsThu, 21 Oct 2010 12:00:12 +0000macleans.cahttp://www2.macleans.ca/?p=152304Manufacturers are rushing out new 3-D TV products, but some analysts see trouble ahead

At a recent trade show in Tokyo, Toshiba unveiled a 3-D television that doesn’t require users to wear bulky glasses. “A dream TV is now a reality,” said Masaaki Oosumi, president of Toshiba Visual Products. The main impediment to widespread 3-D TV adoption has always been that consumers—at least half of them, according to Nielsen research—refuse to buy 3-D TVs because of the hassle of wearing special glasses.

Despite that obstacle, industry research firm iSuppli estimates that by 2015, 40 per cent of TVs sold will be 3-D. Other manufacturers are betting on 3-D, too. Nintendo will soon launch a glasses-free hand-held gaming console, the 3DS. But even as manufacturers rush to churn out more 3-D products, some analysts say the sales predictions are too bullish. “If [the iSuppli forecast] is true, I’ll eat my light bulb,” says Alan Middleton, a consumer behaviour expert at the Schulich School of Business in Toronto. It’s true that Toshiba has overcome the biggest hurdle to mainstream adoption, but consumers can be fickle, says Middleton. For one thing, 3-D appeals particularly to sports fans and their “dream TV” doesn’t max out at 20 inches, like the new Toshiba. It also likely costs less than the Toshiba’s $2,950 price tag. Then there’s the question of comfort. The new Toshiba model produces its 3-D effect by shooting nine beams of light at each eye at slightly different angles. But to get a clear picture, viewers need to position themselves at a specific angle to the screen.

Another challenge for manufacturers will be to convince the average consumer to buy 3-D TVs when most TV content still isn’t filmed in 3-D. After all, “no one seriously expects all TV programming to gradually be converted to 3-D, unlike HD,” says Stewart Clarke, editor of TV industry magazine TBI. “There’s unlikely to be much demand to watch the six o’clock news in 3-D,” he adds. For those reasons, Clarke says it’s still too early to know if 3-D will become the new standard at home. Middleton agrees. “Mass adoption is certainly not going to happen in five years,” he says. “In 10 years, it’s possible, but before then? I expect not.”

]]>http://www.macleans.ca/economy/business/the-future-or-a-flop/feed/0Japan puts the elderly to workhttp://www.macleans.ca/news/world/out-of-the-hammock-and-back-in-the-office/
http://www.macleans.ca/news/world/out-of-the-hammock-and-back-in-the-office/#commentsThu, 26 Aug 2010 14:40:47 +0000macleans.cahttp://www2.macleans.ca/?p=143127Solution to an aging society: out of the hammock and back in the office

Kato Manufacturing, in Nakatsugawa, in central Japan, is hardly a relaxing place. Generators grind, the air pounds with the slam of steel presses, and hundreds of pieces of metal rattle as they’re shuffled and arranged and transported on wheeled carts. In the middle of the racket, 73-year-old Hisao Kitawaki works steadily, showing a new employee how to guide a steel basket filled with grease-laden parts—for autos, airplanes, hairdryers—into a cauldron of cleaning solution. He uses a white towel to pat the sweat from his face; steam clouds his glasses.

A steel-products factory is an unlikely hangout for a man his age. But you won’t catch Kitawaki complaining—he’s exactly where he wants to be. Eight years ago, just as he was growing bored with the hobby-filled life of a pensioner, he saw an advertisement Kato put in the paper looking for special kinds of workers: old ones. “The only condition was that you had to be at least 65 years old,’’ Kitawaki says. “Okay, I thought, I meet that condition. The timing was perfect.’’

Katawaki isn’t alone. About half the 100 employees at Kato—which is tucked among rice paddies outside the industrial centre of Nagoya—are 60 or older, including 20 in their 70s, making the company a leader in Japan’s full-throttle campaign to lure retirees off the golf course and back into the labour force. Already, the number of Japanese workers aged 60 or older has increased more than 20 per cent in the past four years, to 11.3 million today—making the Japanese elderly the hardest working among the world’s top economies. If the government has its way, there will be many more seniors joining the fray in the coming years.

The reason for all the fuss? Japan is the world’s most rapidly aging nation, and bureaucrats here are petrified the country’s generous pension system will run aground as benefits outpace contributions. More than 22 per cent of the country’s 127 million people is 65 or older, and that is forecast to increase to over 30 per cent by 2035. Meanwhile, there are fewer and fewer young people paying into the system. And a highly skilled and experienced generation—baby boomers born between 1947 and 1949—is drifting into retirement, potentially sapping the economy of valuable knowhow when it’s needed most.

And so already, some 95 per cent of companies that fall under a 2006 elderly employment law have programs to make room for workers between the ages of 60 and 65. Now the government is aiming for an even higher age bracket. “We’re trying to get companies to create systems in any way possible to allow people to work until 70,’’ said Hiroyuki Itoh, head of the labour ministry’s elderly worker rehiring section. At the same time, bureaucrats are scaling back a strong disincentive to work: the generous government-administered pension system. Contributions are being hiked and benefits gradually cut, and the eligibility age is being raised in stages from 60 to 65.

Japanese big business isn’t exactly embracing the elderly worker. But change is happening across the board—from Honda to Sanyo to small co-ops—as companies scramble to adapt to the greying population. Many, in fact, see opportunity in an aging Japan. Kenji Ueda, a voluble 72-year-old former gas company executive in Tokyo, for instance, has started a temporary employment agency staffed exclusively by the elderly. He says the firm is thriving. “We recycle retirees like we recycle industrial waste!’’ he declared in a lively interview in his downtown office. And at an agricultural co-operative in tiny Kamikatsu, a hamlet wedged between steep mountains on the island of Shikoku, farmers in their 70s and 80s are making impressive profits—sometimes as much as US$20,000 a month—supplying seasonal garnishes like cherry blossoms to the country’s most elegant restaurants.

Many of the advances are being made by small, unknown outfits like Kato. The company launched its elderly work plan in 2002 when it needed people for weekends and holidays. The firm’s fourth-generation president, Keiji Kato, installed brighter lighting on the factory floor to help older workers with weaker eyesight and cut the weight of boxes and other items workers have to carry. The response to the ad was great: he got 100 applications for 15 jobs, and has hired many more seniors since them. Many are part-timers, who earn about 850 yen (about US$10) an hour. The oldest is 79. “People who are in their 60s are basically the same as us,’’ said Kato, 49. “We shouldn’t call people elderly until they’re in their 70s.’’

Kitawaki might agree with that sentiment. He retired at 60 from a local car-parts manufacturer, but after a lifetime of non-stop work, he soon got restless. “I thought, ‘Now I’m free!’ But it’s really boring when every day is Sunday,’’ he said. After five years of community activities, gardening, and visiting hot springs, he saw Kato’s advertisement and jumped at the opportunity to supplement his pension. Eight years later, he still has some fire left in the belly. “Right now, my target is 75,’’ he said, wiping his brow on the factory floor. “After that, I have some other things I want to do, like just enjoy myself.’’

Kitawaki is a rookie compared to Tsuneko Hariki. The 89-year-old works for the Irodori co-operative in Kamikatsu picking tree leaves. She wakes every morning, fires up her computer to find out which leaves are selling best that day, and then waddles out into her fields to help her family pull cherry blossoms, Japanese maple or nandina leaves from the trees. Then she sits down in her work shed and stacks them in styrofoam trays. So far she’s paid a combined US$110,000 for the down payments of two of her grandsons’ first homes—and she’s not done yet. “I like to make money,” she says with a giggle.

Despite the advances, businesses remain ambivalent: while nearly all companies have elderly employment plans, fewer than half can offer jobs to all the 60-year-olds on staff who want them. Some haven’t been able to come up with jobs that are attractive enough. Honda, for instance, revamped its rehiring program in spring after not a single employee retiring last year volunteered to stay on.

Some argue government measures aren’t strong enough. Critics have called for raising the minimum retirement age to 65 or abolishing it entirely. But others question the very idea of an elderly workforce.

Akihiko Matsutani, an expert in the aging society at the National Graduate Institute for Policy Studies in Tokyo, said Japan should spend more time lowering the cost of living for seniors by building affordable housing rather than forcing them to continue making money. “It’s a scam. They’ve told these people all their lives that they’re going to get a pension at 60, and now they say they don’t have the money?’’ he said. “What kind of a country is that?’’ And still others say Japan should instead open its doors to more immigrants like countries in Europe and North America.

But, for all the shortcomings, Japan is making progress. And the real heroes of the story are the workers themselves. Thanks to a low-fat diet and an active lifestyle, Japanese not only live longer than the rest of us, but stay healthier too. Studies show they believe work pays the bills, but also keeps them fit, staves off senility and gives them a role to play in society. Maybe that’s why they aren’t terribly interested in quitting: a 2006 government survey showed two-thirds of Japanese men don’t want to retire until 65 or later, while a quarter want to work indefinitely.

Asao Arita is a prime example. The 74-year-old is a professional welder at Sanyo Steel Works outside of Hiroshima. He works an average of 50 hours a week including overtime, has a 100 per cent work attendance record and commutes by bicycle. He jogs on his days off. And there’s no telling when he might hang up his hard hat. He just shrugs when asked if he can last until 80. “If I can keep my youthfulness, then it’s better to get out of the house,’’ he said during a break, chuckling how people ask in amazement whether he’s still welding. “I’m always thinking how I can do a better job.’’

Let’s get the good news out of the way first. The unilateral elimination of all remaining tariffs on production inputs in today’s budget is terrific public policy, a shot in the arm for Canada’s manufacturers, and a timely example to the rest of the world. It will lower costs, save on paperwork, and improve productivity. It will make Canada the G20’s first tariff-free zone, and as such is likely to prove an attractive incentive to locate a plant here.

End of good news.

The rest is simply bewildering. It was to be expected the budget would be inadequate; nothing suggested it would be quite so trivial as this. A merely inadequate budget would have made no cuts in spending in the coming year, notwithstanding a deficit projected at $54-billion, but would have pencilled in cuts in succeeding years. If it were really inadequate, it would have left these mostly unspecified, leaving skinflint critics like me to splutter at the vagueness of it all. We’ll believe it when we see it, we’d say, in the pleasant anticipation of the scathing articles we would write about next year’s budget, when the government would once again fail to deliver on cuts — the economy is still just a little too fragile, it would claim, again — pushing off the day of reckoning yet another year into the future.

As I say, that’s what an inadequate budget would have included, together with handsome bar charts showing the deficit declining majestically to zero. But that’s not what’s in this budget. This budget has no spending cuts this year — in fact, it projects an increase of $4.5-billion from what was forecast as recently as last September. But it also has no cuts, or next to none, in future years. The September fiscal update projected spending over the next five years (fiscal 2011 through 2015) at $1.247 trillion. The budget now puts that figure at $1.245 trillion. Total spending cuts: $2-billion. Over five years. $400-million a year, from a budget of roughly $250-billion.

Of course, that’s the net: the budget claims gross spending cuts, before offsetting spending increases, of $17.5-billion — again, over five years. How do they make those not-so-draconian cuts? They take about $2.5-billion — a billion a year, at the peak — out of Defence. Easy enough: Defence is hardly the opposition’s pet, and the cuts merely slow the projected growth in defence spending, from the torrid to the slightly less torrid.

Another $4.5-billion, or $1.8-billion a year at peak, comes out of foreign aid. Even easier: foreigners don’t vote in Canadian elections.

About $2.5-billion in “expected savings”, or $625-million a year at peak, is accounted for by closing a few corporate tax loopholes. Fair enough: if the loopholes themselves should really be regarded as a form of tax expenditure, then I suppose closing them counts as cutting spending.

The largest single saving, $6.5-billion in all or $2-billion a year at peak, comes from a two-year freeze on departmental operating budgets. That sounds tough, until you realize they’re freezing spending at 2010-11 levels: that is, at the very height of the stimulus-enhanced, shovels-in-the-ground, money-out-the-door frenzy. In 2011, according to the budget’s breakdown of federal expenses (p. 180), “operating expenses subject to freeze” totalled $54.9-billion, fully $10-billion more than they were just two years before. That’s where they’re freezing it. The peak has become the base.

Oh, but I’ve forgotten program review. You know, where the government asks every department to assess their lowest-priority and lowest-performing programs, with an aim to “reducing costs while improving efficiency.” Must be difficult: the budget pencils in a maximum of just $288-million a year in efficiency savings from the 2009 program review: one-tenth of one per cent of program spending. The federal government is, apparently, 99.9 per cent efficient. Corporate welfare, transfers to money-losing Crown corporations, “regional development” pork: all are sacrosanct. Transfers to provinces must continue to rise at 6 per cent per annum, eternally. Even the wealthiest old folks must continue to receive their federal cheques.

So this is where we’re at. The previous Liberal government having increased spending 47 per cent in its last six years in office; the Conservatives having increased spending another 19 per cent in its first three years (“good times”), and a further 20 per cent over the next two (“bad times”); after doubling spending, in short, in the space of a decade, the government’s notion of restraint is more or less to leave it there. Oh, some spending drops out when they’ve run out of hockey rinks to build and roads to repave. But in 2015, spending will still be higher, as a per cent of GDP, than it was in 2006. Measured in real dollars per capita — the more meaningful gauge — it will be 12 per cent higher.

And after all that, they still leave us in deficit. The budget boasts of a plan to “return to budget balance,” but it doesn’t even deliver what it claims. Though it forecasts five straight years of growth averaging 5 per cent per year — no double-dip recession, no aftershock of the financial crisis, no flareup of inflation or spike in interest rates, just rosy scenarios as far as the eye can see — and though it counts on revenue growth of nearly 7 per cent a year, it still shows a small deficit in 2015, six years after the recession that was the supposed cause of it all.

It wasn’t, of course. Only a fraction of the current deficit was brought on by a recession-induced decline in revenues, and even that would not have been the case had the government not spent us to the edge of deficit during good times. The rest had nothing to do with stimulating the economy — the recovery began months before any shovels hit the ground, on the strength of unprecedented central bank action: monetary stimulus, not fiscal, was the necessary and sufficient remedy for our ills.

The government ran us into deficit for purely internal reasons: in the first place to avoid defeat in Parliament — the deficit that the Finance minister now trumpets as part of his plan all along was nowhere evident, you’ll recall, in his November 2008 statement. And having first taken the plunge, it found it rather enjoyed it. All those projects to announce, all those ribbons to cut, all those lovely oversized novelty cheques to hand out, with a grinning Conservative MP in every picture. It corrupted itself, and hoped desperately to corrupt the country.

And bearing down on us, remorselessly, is that fiscal freight train of which we’re all uneasily aware, but which the budget, incredibly, never mentions: the coming retirement of the baby boom generation. This is the point: if it were just about today’s deficits, that would be one thing. But the deficits we are running now are as nothing compared to what is to come; the discretionary spending we are merrily running up on our credit cards today is a small fraction of the costs that will engulf us as those aging baby-boomers start crowding the hospital wards. We should be running surpluses in these years, not deficits. And yet the government delivers this empty, almost flippant budget.

Even a year ago, it was still possible to be shocked by this. But now? One is surprised, it is true, by how unconcerned the Conservatives are about the state of the country’s finances, how little they are prepared to do about it — surprised, but not shocked. Those Conservative faithfuls who have been hanging on all these years, in the hopes that, eventually, someday, with one of these budgets, this government would start to act like conservatives, must now understand that that is not going to happen. Conservatism is not just dead but, it appears, forgotten.

]]>http://www.macleans.ca/politics/ottawa/the-government-delivers-an-empty-almost-flippant-budget/feed/177Econowatchhttp://www.macleans.ca/economy/business/econowatch-35/
http://www.macleans.ca/economy/business/econowatch-35/#commentsFri, 11 Dec 2009 13:30:13 +0000Jason Kirbyhttp://www2.macleans.ca/?p=97310A weekly scorecard on the state of the economy in North America and beyond

Even before Canada’s job market shifted back into high gear with Friday’s encouraging jobs report, it was clear something fundamental had changed. Never mind the recent prognostications by analysts about better days ahead. Sometimes all the cues you need can be found in the lives of the people behind the statistics.

Take the story of an employee we’ll call Janice who works at a small, struggling auto parts supplier outside Toronto. As the economy began to crumble last year, management put everyone on a four-day workweek and slashed pay, even as they rewarded themselves with bonuses. Workers weren’t happy, but what could they do? It was brutal out there.

Then a few days before the new employment data was released, the higher-ups tried to turn the screws again with more pay cuts. Only this time a couple of employees in the sales and accounting departments did something that even two months ago would have been unheard of—they told their boss to shove it. “Quitting felt so good,” Janice said, after giving her notice. And here’s the kicker: she didn’t even have another job lined up yet.

That, folks, is what economists describe as a rebound in confidence. But most people would just call it chutzpah. And it’s something we haven’t seen in the labour market for a very long time.

Make no mistake, the fact the economy added 79,000 new jobs in November doesn’t guarantee a prompt and speedy recovery. There are still vast numbers of Canadians out there fearful for their jobs. Younger workers in particular have felt the brunt of the recession, with an unemployment rate nearly twice the national average. Nor are investors convinced Canada’s economy is back on solid ground. It’s not gotten much attention yet, but Canada’s stock market has been sputtering sideways for months now, with the much-heralded rally actually ending back on Sept. 16, when the TSX closed at 11,555 points—almost exactly where it languishes today.

But put all that aside for a moment. During the recession Canadian employees were repeatedly asked to take one for the team. Yet prior to the downturn, Canada was in the throes of a labour shortage. As skilled workers begin to reassert themselves, the balance of power will shift back to its previous state. It may take some time, but you can bet many disgruntled employees are just plucking up the courage to follow in Janice’s footsteps.

THE GOOD NEWS

Building boom
The Canadian real estate sector continues to drive the country’s economic recovery even as some warn of the possibility of a housing bubble. Statistics Canada said the value of building permits hit a 13-month high of $6.1 billion in October, an increase of 18 per cent. Economists had predicted a one per cent jump.

TARP tamed
The Obama administration is planning to cut its Troubled Asset Relief Program by some $200 billion as Wall Street appears to be on the mend. The U.S. government now plans to spend just $141 billion over the next decade on the financial sector.

’Tis the e-season
U.S. online retailers enjoyed a five per cent jump in sales on the first Monday following American Thanksgiving, now known as Cyber Monday, the day when Americans return from a holiday spent window shopping and place online orders. The US$887 million that was spent equalled the busiest e-commerce day on record.

You’re hired
Restaurants, grocery stores and other retailers are hiring more employees, as confidence in the economic turnaround grows. In November, nearly four per cent of all job applications resulted in hires, the highest level so far this year.

THE BAD NEWS

Cool on cars
Automakers may be seeing a faint light at the end of the tunnel as North American sales of cars, trucks and SUVs gradually pick up—but Canadians don’t seem to be doing much of the buying. Car sales in Canada were down 2.9 per cent in November after driving off a cliff in October. By contrast, vehicle sales in the U.S. market were essentially flat year-over-year, with observers blaming the U.S. government’s Cash for Clunkers program for recent volatility in U.S. sales numbers.

Factory blues
Manufacturing levels in the U.S. did not increase as much as economists had hoped in November. The Institute for Supply Management’s manufacturing index fell two points from the month before to 53.6. Nevertheless, the index still shows an increase in output year-over-year, suggesting the economy continues to expand.

Busted
The number of U.S. companies and people being pushed into bankruptcy continues to soar. Bankruptcy petitions were up 26 per cent in November compared to the same time last year, according to data compiled from court filings by Jupiter eSources. The good news is there were slightly fewer bankruptcy petitions in November than October. Still, the first 11 months of this year resulted in 1.3 million U.S. bankruptcy filings, about 21 per cent more than in all of 2008.

Graph of the week

A real recovery • The very modest GDP growth in the third quarter suggested a recovery in Canada won’t be easy. But there are more encouraging signs that the recession is truly over. Both consumer spending and business investment posted the biggest gains since 2007.

Signs of the times

Don’t stand between a banker and his bonus. The board of the Royal Bank of Scotland threatened to resign en masse after the British government suggested it might veto bonus payments for 20,000 investment bankers. Hundreds of the bankers have already reportedly quit in protest. The bank received a nearly $80-billion bailout last year, and has come under intense scrutiny for its bonus plans.

Fore! Close! The game of golf has been sent running for cover by the recession. This year, 114 courses have closed in the U.S. as players cut back on green fees. Several others have been forced into bankruptcy as values of some courses have fallen as much as 50 per cent in the real estate crash. The industry has been hit by its own credit crunch, too, as golf course lenders have turned off the taps.

Alligator farmers in Louisiana, the alligator farming capital of the world, have felt the bite of hard times. Last year, the farmers picked 500,000 wild alligator eggs. This year, they haven’t taken any as demand for luxury alligator skin products, from watch straps to hand bags, has disappeared. Their troubles have been made even worse by an oversupply of alligator skin in recent years.

Damn the recession, it’s full speed ahead for the cruise ship industry. Royal Caribbean just launched Oasis of the Seas, a US$1.4-billion ship that rises 20 stories above the sea. Norwegian Cruise Line has an equally big ship in the works—the US$1.2-billion Norwegian Epic. Despite the downturn, the companies say they’re taking the long view with ships that will be plying the seas for 30 years.

Latest intelligence

After months of shedding workers, Canadian companies are finally hiring again. Some 79,100 jobs were created in November, including many in the key private sector. That blew by economists’ forecasts and, when combined with similarly positive U.S. jobs data, raised hopes that the economy is recovering faster than expected.

“Job numbers tend to be quite volatile, but there may be something to this.” - Eric Lascelles, chief economics and rates strategist, TD Securities

“November’s net hiring was all the more encouraging in that it included a swing back toward paid employment at the expense of self-employed jobs.” – Avery Shenfeld, chief economist, CIBC World Markets

“With the unemployment decreasing and the participation rate rising, there is no doubt that the Canadian labour market is improving.” – Yanick Desnoyers, assistant chief economist, National Bank Financial

The Week Ahead

FRIDAY, DECEMBER 11: The U.S. Census Bureau will release retail sales figures for November. Sales are expected to rise slightly.MONDAY, DECEMBER 14: The capacity utilization rate of Canadian industries will be reported by Statistics Canada. The rate hit a record low of 67.4 per cent in the second quarter of this year.WEDNESDAY, DECEMBER 16: Statistics Canada will report manufacturing sales for October. Sales were up 1.4 per cent in September.

]]>http://www.macleans.ca/economy/business/econowatch-35/feed/7Parity partyhttp://www.macleans.ca/general/the-loonie-requires-urgent-inaction/
http://www.macleans.ca/general/the-loonie-requires-urgent-inaction/#commentsFri, 30 Oct 2009 15:12:04 +0000Andrew Coynehttp://www2.macleans.ca/?p=89380Even if the Canadian dollar were to mirror the U.S. in value, Andrew Coyne says that's no reason for celebration

Once again the dollar is flirting with parity, and once again everyone is very excited about it. Why? Objectively, there is no more significance to the dollar being worth US100 cents than any other value, except that 100 is a nice, round number.

Yes, it means the Canadian dollar is worth as much as a U.S. dollar. But so what? The only reason anyone pays attention to this is because they have the same name. If we were to call our currency something else—I have long favoured “the pelt”—then the mere fact that on any given day, between one currency being worth more than the other and the reverse, their values happened momentarily to coincide would attract little notice. But because they are both called the dollar, it gives rise to the entirely occult belief that the two ought naturally to be at par, the approach of which is celebrated as if it were some kind of cosmic convergence.

That is among those who are not busy complaining that the dollar is “too high.” Indeed, if there is one belief more fixed in popular consciousness than the parity myth, it is that the dollar is always at the wrong level. When it is low it should be higher. When it is high it should be lower. Of course, that doesn’t mean anyone wants to see a rising dollar—why, the only thing worse than that is a falling dollar. In short, while clearly the dollar should never be where it is, on no account should it ever be somewhere else.

Just now the concern is over the high dollar, mainly among the manufacturing industries. Not every manufacturer, mind you. For while a high dollar drives up the price of Canadian exports to the U.S, it also drives down the price of imports from the U.S. In our highly integrated economies, many manufacturers operate on both sides of the border, importing intermediate goods from one country for assembly in the other. So what they lose on the swings they gain on the roundabouts.

Still, it’s the ones who are hurting we always hear from, their cries taken up by the ever-vigilant Do Something lobby. A bank economist argues in a recent paper that “speculative foreign exchange market forces” are “hollowing out” the Canadian economy. “We may be sacrificing business plant and equipment,” writes CIBC’s Avery Shenfeld, “on the altar of a strong currency.”

The last time we heard the “hollowing out” alarm, it was because the low value of the dollar (as it then was) made Canadian assets a steal for foreign investors. Now the high value of the dollar is making them worthless. Okay: either the dollar’s current lofty value is of some permanence, based on fundamental economic factors—oil prices, the weakness of the American economy, Canada’s relative strength—or it is an illusion, driven by “speculative” forces.

But if it’s the latter, then manufacturers should be able to look past any short-term fluctuations, as should their lenders. And if it’s the former, well, what then? Shenfeld wants the Bank of Canada to step in to drive the dollar down. But, in fact, the bank’s ability to do this is quite limited. Merely selling dollars into foreign exchange markets will not work over the long run, if the overall supply of dollars is unchanged, that is absent a loosening of monetary policy.

But if the bank starts setting monetary policy to hit some target exchange rate, it cannot also hit its target for inflation. Perhaps this seems like an acceptable trade-off to you. But, in fact, it’s not even a trade-off—any reduction in export prices from devaluing the currency will be cancelled out by the rise in domestic prices.

That only emboldens a more radical Do Something faction. Short-term fixes for the dollar are no use, they agree. The answer, rather, is to fix its value, once and for all. Of course, exactly what value to fix it at is an interesting question. The last time we heard from the fixed exchange rate crowd it was sold as a cure for the low dollar.

But, in fact, fixed exchange rates are never truly fixed: in time, imbalances build up that can only be relieved by revaluing. So what might have been a gradual process of adjustment to changing economic conditions under flexible rates is compressed into a single, shuddering jolt. You get all of the uncertainty of a floating rate, and none of the benefits.

If rates really were fixed, there would be no reason to maintain separate currencies. Put another way, the only truly fixed-rate regime would be a single North American currency, which in practice means adopting the American dollar. Maybe this would make sense if we were Argentina, and had proven we were incapable of running our own monetary policy. But as it is this strikes me as a solution in search of a problem.

A floating dollar may be unsettling, but it is also useful, particularly in a commodity-driven economy such as ours. When the dollar falls, in response to a decline in, say, the price of oil, the effect is equivalent to a national pay cut, restoring competitiveness much more quickly and easily than would be possible if wages had actually to be reduced directly. The same applies in reverse—a higher dollar spreads the wealth when oil is riding high, making imported goods more affordable.

This is a situation, in other words, that cries out for urgent inaction. For God’s sake, do nothing. M

]]>http://www.macleans.ca/general/the-loonie-requires-urgent-inaction/feed/24Econowatchhttp://www.macleans.ca/economy/business/econowatch-28/
http://www.macleans.ca/economy/business/econowatch-28/#commentsFri, 16 Oct 2009 12:30:56 +0000Steve Maichhttp://www2.macleans.ca/?p=87179A weekly scorecard on the state of the economy in North America and beyond

The Canadian economy has answered a lot of questions for us in the past few months. Our housing market stumbled, but didn’t go into free fall. Our mining, manufacturing and construction industries suffered, but did not collapse. Retail sales slowed, but you won’t see row upon row of boarded-up stores when you venture out holiday shopping next month. And, of course, it turns out our banks are a fair bit more solid than many gave them credit for.

All of that must qualify as welcome and somewhat surprising news, and the latest bit of encouragement came last week with the release of September jobs figures. As the kids headed back to school, the employment situation in the U.S. continued to worsen—another 263,000 jobs vapourized as the world’s largest economy searches for a way to staunch the bleeding. But in Canada, 31,000 jobs were created, a second straight month of improvement, far outpacing even the rosiest projections on Bay Street.

Even the details were encouraging. Whereas recent months had seen only gains in part-time work and self-employment, this time the hiring was driven by full-time jobs. The most embattled sectors (manufacturing up 26,100, construction up 24,600) were the ones showing the most dramatic turnaround. And Ontario, the province that has suffered the worst by far in this downturn, saw employment rolls swell by 62,000 full-time positions.

Another question answered, right? Well, maybe. There remains one huge element of uncertainty in this recovery, and the rosy jobs figures point directly to it. In September the gains were led by the public sector, while private employers laid off another 17,000. In other words, this surprise surge in employment represents your tax dollars at work. The stimulus spending is indeed doing its job, creating publicly funded infrastructure and building projects that serve to bolster economic activity when it’s needed most. But everybody knows that a government can’t single-handedly drive an economy for long, and that is precisely what it’s doing now.

That is the one question that remains, and the only one that matters: what happens when the stimulus stops and interest rates rise? We’re going to have a huge debt to pay, and that’s when we find out exactly what is left of private sector demand, and just how deeply we are tied to the fate of our number one trading partner. Perhaps we will be pleasantly surprised again.

GRAPH OF THE WEEK: No more easy money

With tightened lending and mounting job losses, the amount of consumer credit outstanding has plummeted. U.S. households are retrenching, which is good, but until consumers start borrowing and buying again, a real recovery may be a long way off.

GOOD NEWS

Mortgage madness
With interest rates at record lows, and house prices a shadow of their former selves, Americans are diving back into the housing market. An index that tracks U.S. mortgage applications surged last week by 16.4 per cent to its highest level since May, according to the Mortgage Bankers Association. Rates on a 30-year fixed mortgage have dipped below five per cent, a four-month low.

Debt be gone
America’s new-found frugality isn’t good for carmakers and restaurants, but it’s working wonders for households’ shattered balance sheets. The amount of consumer debt outstanding fell $11.9 billion to $2.46 trillion, the seventh straight monthly drop. The biggest decline showed up in credit card debt, which fell $9.9 billion, or 13 per cent.

Retail rebound
There is a glimmer of hope for U.S. retailers. The biggest chain stores in the country posted their first sales increase in a year, jumping 0.6 per cent in September compared to the same month last year. The result was higher than expected, and a hopeful sign leading into the all-important holiday shopping season—though analysts still caution that overall sales may remain weak.

BAD NEWS

Trading down
Canada saw exports and imports fall in August as it posted a trade deficit of $2 billion. Exports declined 5.1 per cent and imports were off 2.8 per cent. It was the fifth consecutive month the country has recorded a trade deficit. The biggest decline was in the export of aircraft and telecommunication equipment. The trade surplus with the United States also narrowed.

Building blahs
After promising signs that Canada’s housing market has stabilized, the number of new housing starts fell 4.6 per cent in September. The Canadian Mortgage Housing Corp. said the drop was the result of a slowdown in multi-unit home construction.

Lofty loonie
The Canadian dollar surged past US97 cents this week. Analysts now say it could reach parity with the U.S. dollar within the year. While the rising loonie is a vote of confidence in the Canadian economy, it could also further dampen trade and restrict overall economic growth going forward.

Busted flat
The number of Canadians filing for bankruptcy in August was up 37 per cent compared to the same period last year. The bankruptcy rate showed some improvement compared to July, but economists warn that the numbers are still very weak, especially in a month that traditionally sees fewer filings.

SIGNS OF THE TIMES

The Italian fashion design firm Gianni Versace is closing its boutiques in Japan after 30 years. The move reflects the deep slump in demand worldwide for luxury goods, like Versace’s pricey handbags. Louis Vuitton has also seen sales fall in Japan—once one of the most important luxury markets in the world. It recently cancelled plans to open what would have been its largest store in Tokyo.

Google has long been known for the generous perks it grants employees, like the free meals at company cafeterias. But in the wake of the recession, the company is looking to change that image. In the current climate, employees are simply grateful for their well-paying Google jobs, company CEO Eric Schmidt said recently. Google co-founder Sergey Brin echoed those comments, adding, “I think it’s important to reset the culture from time to time.”

The U.S. has launched some ambitious stimulus programs—like cash-for-clunkers and the home tax credit—aimed at getting consumers spending again. Now, some economists and politicians are floating the idea of a whole new kind of program—a tax credit for companies that create new jobs. Economists say a little help from Uncle Sam might be the one thing that can get companies hiring again.

At least one banker is still trying to atone for his industry’s role in the financial crisis. Stephen Green, chairman of the global banking giant HSBC, said in a recent interview that the banking industry “owes the real world an apology.” It also needs to learn lessons about not just governance, but ethics and culture, he said.

LATEST INTELLIGENCE

In what is the surest sign yet that the Canadian economy has finally turned a corner, the unemployment rate fell to 8.4 per cent in September, from 8.7 per cent the previous month. The economy added 31,000 jobs­, beating even the most optimistic forecasts. It was the largest increase since May 2006.

“This was undoubtedly a strong report, and suggests that positive momentum in the Canadian labour market is gaining steam.”—Millan Mulraine, economist, TD Securities

“Even though we have some good jobs news today we are not out of the woods yet . . . Just as Canada was dragged into recession through no fault of our own, our recovery could be affected by economic events beyond our borders.”—Prime Minister Stephen Harper

]]>http://www.macleans.ca/economy/business/econowatch-28/feed/4What a recession feels likehttp://www.macleans.ca/economy/business/what-a-recession-feels-like/
http://www.macleans.ca/economy/business/what-a-recession-feels-like/#commentsMon, 26 Jan 2009 04:41:44 +0000Philippe Gohierhttp://blog.macleans.ca/?p=26133Less than 20 years ago, 60 per cent of Canadians said they were struggling to get by

For many, life during the recession of the early ’90s is a distant, rapidly fading memory. And for anyone under 40, it’s the equivalent of a natural disaster in a far away place: You know it happened, and you know that it made many people’s lives miserable, but there’s no visceral connection to it, all of which makes it hard to truly grasp what life was like in the midst of it—and, by consequence, what might await Canadians this time around.

To describe the Bank of Canada’s economic forecast for 2009 as grim would be an understatement. The Bank expects the recession to peak sometime in the next six months, with no tangible rebound until 2010. “Our exports are down sharply,” Bank of Canada Governor Mark Carney told reporters last week, “and domestic demand is shrinking as a result of declines in real incomes, household wealth and confidence.” In all, Canada’s GDP will shrink by 1.2 per cent in the coming year, he predicts. And yet, there was a sprinkle of good news amidst the bad: 2010 could turn out to be a banner year, with growth projected to settle at an “above potential” 3.8 per cent. In the meantime, 2009 will bring both the best and the worst of the recession. The wave will crest but it will also break—just like it did in 1992.

So what was Canada like in 1992? In a word: unemployed.

After steady increases in 1990 and 1991, the unemployment rate hit an eight-year high in 1992: a whopping 11.2 per cent for the year and a peak of 11.8 per cent that November. (An economic think tank suggested the rate would have topped out at 13.7 per cent had 345,000 people not given up altogether on their search for work.) Making matters worse, those who lost their jobs had few prospects for a quick turnaround: the average unemployment spell across the country was 22.6 weeks, a hefty 23 per cent increase from 1989. Ontario—and especially its crucial manufacturing sector—was among the hardest hit, accounting for more than 70 per cent of the country’s job losses. In all, 123 manufacturing plants shut their doors in 1992, leaving 250,000 highly-paid workers out of a job. One restaurant owner in Kitchener was overwhelmed with job applications after posting an want ad for a full-time cashier—at $6.50 an hour. “When you have 290 people apply for one position,” he said, “it makes you wonder what’s happening.” By the time the recession was officially over, 1.6 million Canadians were out of work and another 2 million were on welfare.

At the time, many blamed free trade for those staggering unemployment numbers. A Gallup poll taken in the summer of 1992 found that only four per cent of Canadians supported Canada’s free trade agreement with the U.S. and an overwhelming majority opposed its expansion into NAFTA. On both sides of the border, politicians opposed to the agreement gained significant traction. Jean Chrétien’s Liberals were handed a crushing parliamentary majority in 1993 partly on a promise to re-negotiate NAFTA. (The federal government would later consecrate the deal without pressing for any notable changes.) But no political figure benefited from the debate more than Ross Perot, whose quixotic campaign for the White House was epitomized by a plea to voters to listen to the “giant sucking sound” symbolizing flight of U.S. jobs toward Mexico.

Most of all, though, the wave of unemployment prompted a massive loss of confidence in the Canadian economy. An Angus-Reid poll of residents in 16 countries found Canadians were among the most pessimistic in the world: only 68 per cent expected the economy to improve in the next decade, while 27 per cent figured things would get worse; 60 per cent said they were struggling to get by and 65 per cent were afraid they wouldn’t be able to support themselves in their old age. Even those whose businesses were making money during the recession were aware of just how grim the prospects were for the majority of people. An industrial auctioneer interviewed by Canadian Press in late 1992 said he was making record profits selling off the remnants of failed businesses, but conceded that it was coming at a heavy price: “The last recession cut out the fat. This is cutting out the heart.”

Many of the same trends are re-emerging this time around. Last month, Canada’s consumer confidence level continued its three-month slide, dropping even lower than it did during the early ’90s. “I think what we have on our hands right now,” says Pedro Antunes, the director of national economic forecasting at the Conference Board of Canada, “is very much confidence-led decline.” According to the Conference Board’s report, Canadians have not only seen their financial situation worsen over the past six months, they expect things to become worse still in the near future. Another poll taken earlier this month found 23 per cent of Canadians are worried for their jobs and 33 per cent believe they wouldn’t be able to find work should they be laid off.

Meanwhile, the debate over NAFTA has made a brief reappearance and there are fears—unfounded, so far—that Barack Obama’s presidency could mean a return to protectionist trade policy south of the border. On the employment front, Canada’s job numbers have gotten tangibly worse over the past year. The unemployment rate, currently at 6.6 per cent, hit a three-year high in December—and there are worrying signs it will soon climb much higher, led by a steady decline in Canada’s, and especially Ontario’s, manufacturing sector. (TD Economics predicts Canada could shed as many as 251,000 jobs before the year is over.)

Financial Times columnist Martin Wolf expects 2009 to be the year the underlying institutions that make up the global economy undergo a seismic shift. “Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade,” Wolf wrote in a recent column. “They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration.” Should Wolf’s predictions prove true, it could very well signal an end to the boom-bust cycles that have characterized the economy for the better part of the last century and a half. But if the final year of the last severe recession is a reliable indicator, twelve months of massive unemployment, knee-jerk protectionism, and widespread panic may, in the end, not change much at all.

]]>http://www.macleans.ca/economy/business/what-a-recession-feels-like/feed/1My province is bigger than yourshttp://www.macleans.ca/general/my-province-is-bigger-than-yours/
http://www.macleans.ca/general/my-province-is-bigger-than-yours/#commentsFri, 30 May 2008 20:28:26 +0000Jason Kirbyhttp://macleans.wordpress.com/?p=1470Who does more for Canada? Ontario, the traditional economic engine of the country, or Alberta, the energy dynamo credited with keeping Canada out of the current economic dog house? Both,…

Who does more for Canada? Ontario, the traditional economic engine of the country, or Alberta, the energy dynamo credited with keeping Canada out of the current economic dog house? Both, if you listen to the finance ministers for the two provinces.

Yesterday Alberta’s Iris Evans was in Toronto making her pitch for why Canadians should feel all warm and cuddly towards Oilberta. “When Alberta gains $634 billion a year from GDP of these oilsands,” she told the Economic Club of Toronto, “Ontario gains $110 billion a year.” All told, she said, Ontario and the federal government receive half the taxes collected from the oilsands.

Not one to have his province’s financial fortitude questioned, Ontario Finance Minister Dwight Duncan issued a statement today just to remind everyone who wears the pants around here.

“When Ontario faces challenges, the rest of the country suffers,” Duncan said from the provincial finance ministers meeting. “A strong Ontario means a strong Canada.”

On the surface, this is simple politicking. Alberta knows it must counter the perception in the rest of Canada (isn’t that phrase normally reserved for stories on Quebec?) that it’s not the only one rolling in oil and gas lucre. Ontario, meanwhile, is desperate to squeeze more out of Ottawa for its struggling manufacturers.

But I think this is only the beginning of what promises to be a nasty power struggle between eastern and western Canada. So far, things have been pretty cordial. I doubt that will last much longer as gas prices soar and manufacturers in Ontario and Quebec are forced to lay off thousands of more workers. Ontario won’t trundle off into “have-not province” land without a fight, and you can be damn sure Alberta won’t stand for a grab at its oil and gas royalties. The opening shots have been fired.